Most people who file for Chapter 13 in Pennsylvania have more than one debt, with some of the most common sources being credit cards, medical bills, and mortgages. If this describes you, you should know some basics about the order your debts will be paid in, and to what extent. By understanding a few key facts about the way debts are prioritized in a Chapter 13 case, you’ll be better equipped to plan for financial success. Toward that end, our Philadelphia bankruptcy attorneys explain how creditors are paid in a reorganization bankruptcy in Pennsylvania.
Types of Debt and Payment Order in Chapter 13 Bankruptcy
If you’ve already done some research into Chapter 13 bankruptcy – or, for that matter, into the alternative option of Chapter 7 bankruptcy – you may already know that debts are split into two categories:
1. Dischargeable Debts – Debts for which the debtor will no longer be liable when the bankruptcy is discharged.
2. Non-Dischargeable Debts – Debts for which the debtor will still be liable even after receiving a discharge.
For obvious reasons, these distinctions are critical for debtors, no matter which chapter they choose to file under. However, they are not the only categories into which debts are divided in a Pennsylvania bankruptcy case. In addition to being classified as dischargeable or non-dischargeable, debts are also divided into a few additional categories, which include:
- Priority Debts
- Secured Debts
- Unsecured Debts
These classifications are critical, because they have a direct impact on:
- The order in which the filer’s debts must be paid.
- The extent to which the filer’s debts must be paid.
Keep reading to learn more about how priority, secured, and unsecured debts are treated in Chapter 13 bankruptcy cases in Pennsylvania.
Secured, Unsecured, and Priority Claims in Chapter 13
Secured debts are debts which are “secured” by collateral, hence the term. If the borrower fails to make timely payments on these debts, the lender can seize or repossess the collateral. Some common examples of secured debts in Chapter 13 cases include debts related to vehicles (which can be repossessed) and real property (which can be foreclosed on). A creditor who is owed a secured debt has a secured claim.
In contrast, unsecured debts are debts that are not secured by any collateral. Examples of common unsecured debts in Chapter 13 bankruptcy include medical bills, personal loans, and credit card debt – all of which also happen to be dischargeable debts under both Chapter 7 and Chapter 13. Student loan debt is also unsecured debt, but unlike the aforementioned examples, is typically non-dischargeable in any type of bankruptcy, unless the filer is able to meet specific financial criteria indicating undue hardship. A creditor who is owed an unsecured debt has an unsecured claim.
Unsecured debts can be further divided into two subcategories:
1. Priority Unsecured Debts – Even though these debts are not secured by any collateral, they still take precedence over nonpriority debts. Debts that fall into this category include child support payments, alimony or spousal support payments, and certain types of tax debts, though income tax debts are sometimes dischargeable provided they are at least three years old and meet a few other requirements. Secured debts and priority debts are generally paid first in Chapter 13 bankruptcy.
2. Nonpriority Unsecured Debts – Nonpriority unsecured debts are the least urgent debts in bankruptcy. Creditors with unsecured claims are the last to be paid, using any funds that remain after secured claims and priority unsecured claims have been addressed. The amount you will pay toward these debts depends on a few factors, including:
- How much disposable income you have. All of your disposable income is required to go toward your reorganization plan in Chapter 13.
- Your creditors’ best interests. Creditors holding nonpriority unsecured claims must receive, at bare minimum, the amount they would have received had you filed for Chapter 7 bankruptcy instead of Chapter 13.
Chapter 13 debtors are typically required to pay secured debts and priority debts in full in order to receive a discharge and, where applicable, keep the associated property. To reiterate, this includes:
- Child support
- Debts related to personal injury judgments
- Mortgage debts
- Most tax debts, with some exceptions
You may be wondering why bother filing for Chapter 13 if you are generally required to pay these debts in full, but there are several benefits.
First, Chapter 13 gives debtors time to catch up on missed payments and thereby keep their property and belongings. The most significant example of this is mortgage arrearages, or past due mortgage payments. By filing Chapter 13, a debtor can potentially save his or her house from being foreclosed on, which would likely not be possible without bankruptcy (or in Chapter 7). If you fall behind on your mortgage payments during your Chapter 13 plan, the lender can seek the court’s permission to foreclose on your home.
Additionally, by extending payments over a period of three to five years on a monthly basis, bankruptcy can make payments smaller and more manageable for the debtor.
Finally, when the case is over and the bankruptcy is discharged, the debtor will be in better financial health, and will be better able to build good credit going forward.
Philadelphia Chapter 13 Attorneys Serving Bucks, Delaware, and Montgomery Counties
Chapter 13 can be a powerful tool – but only when wielded properly. Don’t struggle with complicated state and federal bankruptcy regulations on your own: get personalized legal guidance from an experienced Philadelphia Chapter 13 attorney who can protect your best interests and work to make your bankruptcy as simple, efficient, and financially beneficial as possible. At Sadek & Cooper Law Offices, our bankruptcy attorneys have handled thousands of Chapter 7 and Chapter 13 petitions in U.S. Bankruptcy Court for the Eastern District of Pennsylvania. We understand the court’s procedures, the documentation required of filers, and the strategies for finding bankruptcy success.
To talk about your legal options with a Delaware County Chapter 13 attorney, or to speak with our Chapter 13 lawyers in Montgomery County, call Sadek & Cooper Law Offices at (215) 995-2543 for a free legal consultation. Our legal team also includes Philadelphia Chapter 7 lawyers, who can assist you with liquidation bankruptcy.