You pay your general unsecured debts only as much as you can afford during a Chapter 13 plan, with the rest then legally written off forever.
Our last blog post was about how Chapter 7 “straight bankruptcy” deals with “general unsecured debts.” Mostly, they are discharged—legally, permanently written off. There are some exceptions. At the end of the last blog post we said we’d talk next about those exceptions. But before we do, today we want to give the Chapter 13 “adjustment of debts” side. What happens to “general unsecured debts” in a Chapter 13 case?
“Priority” and “General Unsecured” Debts
First, let’s remind you about the difference between these two kinds of unsecured debts. The difference is crucial because of how they completely differently they are treated in a Chapter 13 case.
Remember that priority debts are specific categories of debts that the law says must be treated very specially. They are all on a list at Section 507 of the U.S. Bankruptcy Code. The main “priority” debts in consumer Chapter 13 cases are past-due child and spousal support and certain recent income tax debts.
If an unsecured debt is not on the list of priority debts then it’s a general unsecured debt. They are by far the most common kind of debt.
The Difference in Treatment under Chapter 13
You must pay priority debts in full during the course of the 3-to-5-year Chapter 13 payment plan. You usually only have to pay general unsecured debts to the extent you have money available to pay them.
So, priority debts have to be paid 100%. General unsecured debts are often paid only a small percent, often only 5-10%, sometimes maybe even 0%.
In most situations the result is that during your Chapter 13 payment period you must pay your priority debts in full before paying your general unsecured debts anything.
General Unsecured Debts during a Chapter 13 Case
So during a Chapter 13 case you pay your general unsecured debts as much as you can pay them. But that’s after paying your living expenses, and your secured and priority debts. You usually even get to pay the costs of your case (your bankruptcy lawyer’s fees) and trustee fees ahead of your general unsecured debts.
In fact, if your income goes down or expenses go up during your case, you may even be able to amend your payment plan to reduce what the general unsecured debts get paid because you can no longer afford to pay them as much as you originally expected.
General Unsecured Debts at the End of a Chapter 13 Case
After all this, what happens to your general unsecured debts at your successful completion of a Chapter 13 case? After paying these debts as much as you can afford to pay them (as specified in your court-approved payment plan), the remaining balance, no matter how much, is discharged—legally written off.
At that point you’ve paid your priority debts in full. To the extent you are taking care of secured debts (home mortgage, vehicle loan, furniture debt, etc.), you’ve paid all you need to pay them, leaving them current or paid off. You’ve paid the general unsecured debts whatever percentage (if any) your plan provides, with the rest discharged. You are now current on one or two long-term secured debts you’ve chosen to keep (if you had any), and otherwise you’re completely debt-free.