The Chapter 13 plan provides a proposed reorganization that includes the classification of debt.  Debts are categorized as priority, secured, and unsecured.  A “priority debt” receives its special status from the bankruptcy code, and commonly includes most taxes, domestic support obligations, and administrative costs tied to the bankruptcy proceeding.  Secured debts are those claims that have liens against underlying collateral, which commonly includes homes, vehicles, furniture, and jewelry.  Unsecured debts are those for which there is no underlying collateral.

The bankruptcy code requires that priority claims be paid in full unless such a creditor agrees otherwise.  However, with a domestic support obligation, the debtor is only required to contribute all of their “disposable income” (11 U.S.C. § 1322(a)).  With secured debt, such as a vehicle, the plan must propose the amount to be repaid (which will vary depending on whether the property was owned for more or less than 910 days), and include interest that is set at Prime rate plus a very low margin.

Home loans are repaid respective to the original or modified terms that predate the filing of the bankruptcy.  If a debtor is current on their mortgage, they will continue to pay the lender directly.  If delinquent, the debtor will make the mortgage payment through the trustee, called a “conduit” payment.  If the second mortgage is wholly unsecured, meaning the value of the home is worth less than the outstanding first mortgage, the second mortgage will be treated as an unsecured debt and eventually eliminated.

General unsecured debt is repaid based on a debtor’s ability.  This is determined by a debtor’s projected budget, which includes gross income from all sources, minus monthly expenses.  The debtor, at minimum, must pay unsecured creditors as much under the plan, as the unsecured creditors would have received had the debtor filed a Chapter 7 bankruptcy (called “Chapter 7 reconciliation amount”)(11 U.S.C. § 1325).

The length of the plan, known as the “applicable commitment period” depends on whether the debtor is above or below the median income.  If the debtor is below the median income, the applicable commitment period is three years.  If the debtor is above the median income, the applicable commitment period is five years (See Hamilton v. Lanning, 130 S.Ct. 2464 (2010) & 11 U.S.C. § 1325(d)).  An above median income debtor can reduce the applicable plan length by paying the unsecured creditors in full.