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Kevin O'Flaherty

In this article, we’ll discuss unsecured debt and Chapter 13 bankruptcy in Illinois and answer the following questions:

  • What types of debt are covered under Chapter 13 bankruptcy?
  • How much does income factor into Chapter 13 bankruptcy?
  • What is the “Best Interest of Creditors Test?”

Chapter 13 bankruptcy is an attractive debt restructuring option for those looking to keep certain assets, such as their car and home. But, there is often confusion on which debts are reduced under Chapter 13 and which are just lumped together under one monthly payment. Unlike Chapter 7, which wipes out all your debt and sometimes liquifies your car loan and mortgage if need be, Chapter 13 is meant to allow you to catch up on debt over a 3 to 5 year period.

What Types Of Debt Are Covered Under Chapter 13 Bankruptcy?

Chapter 13 bankruptcy splits your debt into three different categories: 1) priority unsecured debt; 2) secured debt; and 3) unsecured debt. The amount you must pay for each debt differs depending on your income, how much is owed under each type of debt, and what assets you want to keep through the bankruptcy.

In general, you’ll be required to pay your priority debt, such as spousal or child support obligations and tax debts. You can choose to keep or sell any items serving as collateral for a secured debt, such as your house or car. Any secured debt assets must be repaid under Chapter 13 bankruptcy, but you may be able to reduce the amount of the loan to the fair market value of the item. 

Everything else is considered unsecured debt. The amount of unsecured debt that must be repaid can be anywhere from 0% to 100%. The bankruptcy trustee handling your case will consider your disposable income versus how much would have been paid to creditors had you gone through Chapter 7 bankruptcy instead. Whichever is greater is the amount that will be paid to your non-priority unsecured creditors. 

How Much Does Income Factor Into Chapter 13 Bankruptcy?

Under Chapter 13 bankruptcy, every bit of your disposable income must go towards your repayment plan. Debt from secured and priority creditors will be paid first, and whatever is leftover goes to your general unsecured creditors. The court determines your disposable income by reviewing the information entered in your Chapter 13 means test forms. Ultimately, disposable income is anything remaining after paying for necessary living expenses.

The Chapter 13 means test is similar to the means test used to determine if someone qualifies for Chapter 7 bankruptcy. It looks at your income over the six months before the month you filed for bankruptcy. It compares your income to the average median income of others in your geographic area with similar household size. If your income is above the median than you must complete the Chapter 13 Calculation Of Your Disposable Income form. This form has you take appropriate deductions for secured debt and other expenses and then multiplies that monthly figured by 60 to determine the amount unsecured creditors should receive over a five-year repayment plan.

If your income is below the median average, then your repayment plan will be based on the difference between your Schedule I (the total of your monthly income), minus Schedule J (actual monthly expenses). Unsecured creditors will receive a percentage of whatever is left over after priority and secured creditors are paid. If nothing is left over, then the unsecured creditors will receive zero percent.

What Is The “Best Interest Of Creditors Test?”

The best interest of creditors tests calculates how much your non-priority, unsecured creditors should receive under your Chapter 13 repayment plan. It provides a safety net for unsecured creditors, ensuring they are not getting a raw deal just because you filed Chapter 13 bankruptcy versus Chapter 7. The test will determine a minimum amount that should go to your unsecured creditors, and if you can’t pay this amount, your Chapter 13 petition is at risk of denial.

As discussed above, the amount that you must pay your unsecured creditors in Chapter 13 is the greater of your disposable income, versus the value of your non-exempt assets. For example, let’s say you own a car worth $15,000, and you can only exempt $7,000. The non-exempt value is $8,000. Under Chapter 7 bankruptcy, the trustee would have sold your car, paid you the exemption amount, and used the proceeds to pay your general unsecured creditors. The $8,000, and any other money including in this group, is split evening among the unsecured creditors.

Disclaimer: The information provided on this blog is intended for general informational purposes only and should not be construed as legal advice on any subject matter. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship. Each individual's legal needs are unique, and these materials may not be applicable to your legal situation. Always seek the advice of a competent attorney with any questions you may have regarding a legal issue. Do not disregard professional legal advice or delay in seeking it because of something you have read on this blog.


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