The Chapter 13 Plan
When you contemplate filing for bankruptcy, you must take a means test to find out which chapter you qualify for. This involves determining your average monthly income over the previous six months and then subtracting your must-pay obligations, such as mortgage, car payment and groceries. If you have at least $166 left over each month, you must file for Chapter 13 and enter into a plan, lasting three to five years, to pay down what you owe. You must give your disposable income to the bankruptcy trustee every month during this period, and he uses it to satisfy the debts listed in your petition. If any portion of your debts remain unpaid at the end of the plan, these balances are discharged.
How Creditors Get Paid
The bankruptcy code sorts your creditors into categories, organizing them in an order of priority for payment. The upper tier includes debts that are not eligible for discharge, such as family support obligations and some taxes. These creditors must be paid in full. The second tier includes your secured debts, such as a mortgage or auto loan. Typically, you will continue making your current payments on these debts outside your Chapter 13 plan, as part of your regular monthly expenses. If you owe any past due balances to these creditors, they're addressed through your plan payments. Unsecured debts are last in line. These creditors don't receive anything until superior debts are paid, and they may not get all you owe, depending on the amount of disposable income you have available to fund your plan. If you borrowed $50 from your Aunt Rose, she's an unsecured creditor, and she might only receive $30 or so, if that.
Resist the temptation to pay off certain debts just before you file for bankruptcy because you don't want to include them in your petition. Bankruptcy law is firm that you can't make payment to unsecured creditors in excess of $600 during the three months before you file. If you do, the trustee can file a lawsuit to get the money back so it can be apportioned fairly among all your creditors.
After the Plan Is Completed
After your bankruptcy is over, there's no law that says you can't pay your creditors any money they did not receive as part of your Chapter 13 plan. You're free to pay your aunt, or anyone else, if it bothers you that you couldn't entirely satisfy the debt as part of your bankruptcy.