Chapter 13 bankruptcy is a way for debtors to reorganize their debts. Filers submit a plan to the court that states how they wish to pay (or not pay) their debts. These plans may provide payment for secured claims like car notes and mortgages, priority claims likes income tax and child support arrears, and unsecured claims like student loans, credit cards, and medical bills. However, just because all of these creditors are included in a repayment plan does not mean that they are treated equally.
Chapter 13 bankruptcy plans often prioritize repayment of creditors. This means that the trustee will pay certain types of claims before other types. In the Northern District of Texas the claim priority is spelled out in the plan itself. It is as follows:
1st – Administrative Fees and DSO claims in “B”
2nd – Specified monthly dollar amounts to secured claims in “D”, “E(1)”, and “E(2)”
3rd – Pro-rata among attorney fees in “C”
4th – Pro-rata among secured claims in “D”, “E(1)” and “E(2)”
5th – Specified monthly dollar amounts to priority claims in “H”
6th – Pro-rata among priority claims in “H”
7th – Specified monthly dollar amounts to special class claims in “I”
8th – Pro-rata among special class claims in “I”
9th – Pro-rata among claims in “J” other than late filed and penalty claims
10th – Pro-rata among late filed priority claims in “H”
11th – Pro-rata among late filed general unsecured claims in “J”
12th – Pro-rata among 13th — penalty claims in “J”.
The reason for the priority of claims usually makes sense if you think about it. Bankruptcy attorneys and child support recipients get paid first. The longer a case progresses the less likely a creditor will get paid in the plan, because many Chapter 13 cases get dismissed before discharge. If bankruptcy attorneys don’t get paid their fee then they will stop filing bankruptcy cases, and there will be a lot of debtors unable to find a lawyer for their case. I suspect child support recipients get paid first because it is simply good public policy to make sure that children are receiving funds needed for their support.
Car creditors get paid next. I believe the reason for this is that their collateral depreciates, so the creditor is at a greater risk of loss if their claim isn’t paid quickly. Priority claims get paid next. These creditors generally have debts that cannot be discharged in bankruptcy, so there is little risk if they are not paid right away. Each class is paid in succession, and as money runs out the lower priority claims might not get paid at all.