Does Chapter 13 require me to repay all my debts?

Chapter 13 bankruptcy may have somewhat of a lesser reputation than Chapter 7 among some individual filers. Although Chapter 13 is very helpful in many cases, many people hear that it involves paying back all debts, which makes it unattractive to them. However, in reality, all debts do not have to be paid back during Chapter 13.

What must be repaid?

It is true that the heart of Chapter 13 is forming a repayment plan to repay debts over a three to five-year period. Although this makes it sound like every debt must be repaid under the plan, in reality, only some debts fit in this category. Other debts do not need to be repaid at all and some only need to be partially repaid.

Under the bankruptcy rules, certain debts must be repaid in full by the end of the three to five-year plan. These debts include ones not dischargeable in bankruptcy, such as alimony, child support or taxes. Also, the law requires priority debts such as attorneys' fees, filing fees and court costs to be repaid by the end of Chapter 13.

As mentioned earlier, some debts only have to be partially repaid under the plan. The bulk of this is secured debt-debts that are secured by collateral (e.g. mortgage or car loan). The plan requires filers to catch up on overdue payments on these types of debts within the three to five years. However, filers do not have to pay off the entire balance owed. During the repayment period, Chapter 13 protects filers against the threat of foreclosure, repossession and other debt collection tactics.

The debts that often do not have to be repaid at all involve unsecured debts (e.g. credit cards and medical bills) in most cases. Under Chapter 13's rules, filers only have to pay unsecured creditors the amount that the creditors would have received if Chapter 7 had been filed instead. Since Chapter 7 eliminates most unsecured debt, the amount that must be repaid to unsecured creditors is zero in Chapter 13, in the majority of cases.

However, unsecured debt sometimes must be repaid at least partially under the Chapter 13 plan. This can occur if the filer has significant disposable income and an unsecured creditor objects to the repayment plan and asks the court to require the plan include repayment of at least some of the unsecured debt. Fortunately for most filers, this does not occur, as most lack significant amounts of income left over after paying living expenses as well as secured and priority debts each month. As a result, most unsecured debt ends up discharged after only pennies on the dollar (if even that) have been paid towards them.

An attorney can assist you

If you are struggling with debt, it is important to not let rumors of full repayment deter you from considering Chapter 13. For those that qualify, Chapter 13 has many benefits over Chapter 7. To learn more about which type of bankruptcy is right for your unique situation, speak with an experienced bankruptcy attorney.