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Chapter 13 Bankruptcy and Credit Card Debt

Since 1995, Holly Schumpert has provided bankruptcy assistance and representation for both individuals and businesses.

Chapter 13 Bankruptcy and Credit Card Debt

Chapter 13 Bankruptcy and Credit Card Debt

The amount of your credit card debt that is required to be paid is based on numerous factors including but not limited to the person’s household income level, equity in property and the amount of federal tax refunds. Each case is different and to determine what you would be required to pay back to obtain a bankruptcy discharge, you would need to consult with a knowledgeable bankruptcy attorney. The amount a Chapter 13 debtor has to repay is usually between 10% and 100% dollar for dollar. However, even if one has to pay 100%, that balance is frozen at the time of the bankruptcy filing and no longer can assess interest, or other fees. . The remaining amount is discharged at the end of your case and the creditor no longer has any rights to pursue additional collection.

Chapter 13 Bankruptcy and Your Debts

Chapter 13 bankruptcy is a restructuring or reorganization bankruptcy. A repayment plan is determined prior to filing the case that will be for a period of 3 to 5 years. Everyone is different and there are many factors in determining what the plan payments must be for a debtor to receive the discharge at the end of the case. Credit cards usually have the least priority in a Chapter 13 plan and are rarely paid 100%, dollar for dollar.

Debt Priority under the Bankruptcy Code

Bankruptcy law sorts your debts into completely different categories. The 3 main debt classifications are general unsecured debt, priority unsecured debt, and secured debt.

Secured debt includes debts like automobile loans and the other loans that are secured by property. A loan is secured by property if you pledged property in exchange for getting the loan. If you default a secured loan, the lender has the right to take the property to satisfy the debt. That is why if you do not make your automobile payment, the lender can repossess it; if you do not make your house payment, the lender can foreclose; if you do not make your furniture payment the furniture company can issue a replevin and seek return of the property as well as monetary damages.  Secured debts must be paid, at least to some extent in order to receive a discharge of the remaining balance that is not paid in the Chapter 13 plan. In a Chapter 13 case, secured debts are modified to make it more affordable to save the property. In most cases, a debtor can pay less than the actual amount of the balance, lower the interest rate that was contracted for, and lower the monthly payment. One or all of these modifications will usually make it more affordable for the debtor to save the desired property.

Priority unsecured debts are debts that are not secured by collateral or property. These debts are usually non-dischargeable — that means, if you were to file Chapter 7 or Chapter 13, you cannot wipe them out or discharge them. Examples of priority debts are court costs and fines, IRS debt within the last three years, restitution, child support, etc… Some debts owed to the IRS are not priority and are able to be discharged. In Chapter 13, priority unsecured debts are paid over the Chapter 13 plan and any remaining priority debt would survive discharge or, in other words, not be discharged.

Credit card debts are general unsecured debts. General unsecured debts are at the bottom of the barrel; what proportion they get paid depends upon a number of factors, however most times Chapter 13 debtors are not required to pay their credit card debts in full.

How Much of Your Credit Card Debt Will You Pay in Chapter 13?

When you file your Chapter 13 plan, you have to list all of your creditors and propose how you’ll pay every class of debt. Your plan payment should be enough to pay all secured debts if you wish to keep the property securing the debt, and all or some of priority unsecured debts with any remaining priority debt not being discharged. The debtor is expected to pay what they can afford to pay to the unsecured, non-priority creditors, like credit card debt, old debt, medical debt, repossessed car debt, etc… Which can be as low as 10%.

Example:

Mike owes $5,000 on his automobile and $10,000 to a government agency and has a priority debt. To pay these claims with interest, he should pay enough into his Chapter 13 plan monthly to pay $15,000 over the next 3-5 years. Mike also owes unsecured debts from credit cards, old landlords, repossessed vehicles, medicals, etc… totaling $40,000.

Because of Mike’s financial situation, he can only afford to pay $4,000 of the $40,000 credit card and other unsecured debt over the next 5 years. At the end of Mike’s case, he has paid his automobile at a reduced interest rate and possibly reduced balance. He has paid the government’s claim of $10,000. He has also paid $4,000 of the $40,000 owed to the various unsecured creditors. The remaining $36,000 of the unsecured debt is discharged and is no longer his legal liability. 

Credit Card Charges for Luxury Items or With No Intent to Pay

If you incurred credit card debt close to the filing of your bankruptcy, you may not be able to discharge that debt. There are some instances that a creditor may successfully object to the discharge of the debt owed to them.