How Chapter 13 Handles Credit Card Debt
In Chapter 13, you propose a repayment plan lasting 3 to 5 years. Your disposable income -- the amount left after paying secured debts (mortgage, car), priority debts (taxes, support), and living expenses -- goes to unsecured creditors, including credit card companies.
The percentage paid to unsecured creditors depends entirely on your budget. If your income barely covers necessities, the plan may pay 0% to credit card companies. If you have more disposable income, the percentage increases.
The "best efforts" test: Under Section 1325(b), if the trustee or a creditor objects, you must commit all projected disposable income for the applicable commitment period (3 or 5 years). This sets the floor for what unsecured creditors receive.
Why Choose Chapter 13 Over Chapter 7?
If credit card debt is your main problem, Chapter 7 is usually faster and cheaper. But Chapter 13 has advantages in specific situations:
- You fail the means test. If your income is too high for Chapter 7, Chapter 13 is the alternative.
- You have non-exempt property. Chapter 13 lets you keep all property by paying unsecured creditors at least what they would receive in a Chapter 7 liquidation.
- You are behind on mortgage or car payments. Chapter 13 lets you cure arrears over the plan period while keeping the property.
- You have a prior Chapter 7 discharge. If you received a Chapter 7 discharge within the last 8 years, you cannot get another. But you can file Chapter 13 after 4 years. See 1328f.com.
What Happens at the End of the Plan
After completing all plan payments over 3-5 years, you receive a Chapter 13 discharge. Any remaining unpaid credit card debt is discharged. You owe nothing more to those creditors.
Example: You owe $50,000 in credit card debt. Your plan pays 5% to unsecured creditors over 5 years -- a total of $2,500. The remaining $47,500 is discharged. The creditors receive their pro rata share and have no further claim.
Completion rates: Nationally, only about 33-40% of Chapter 13 cases result in a discharge. The rest are dismissed before completion, usually because the debtor cannot maintain plan payments. If your case is dismissed, credit card companies can resume collection.
Chapter 13 Plan Payments and Credit Cards
Your monthly plan payment goes to the Chapter 13 trustee, who distributes it according to the confirmed plan:
- Trustee fee (typically 5-10% of the payment)
- Secured debts (mortgage arrears, car payments)
- Priority debts (taxes, domestic support)
- Unsecured debts (credit cards, medical bills, personal loans) -- whatever is left
Credit card companies are at the bottom of the priority ladder. They receive payment only after all higher-priority claims are satisfied.