There are three types of claims: secured, priority unsecured and non-priority unsecured. Secured claims are claims attached to certain property, i.e., collateral, such as a house or a car. If the debtor does not pay the debt, the secured creditor has the right to repossess the collateral. Unsecured creditors are creditors with no rights against any property of the debtor, such as credit cards, medical bills, personal loans, student loans, taxes, domestic support obligations, etc. Certain unsecured creditors, however, are given priority in bankruptcy, such as most domestic support obligations, most taxes, bankruptcy administrative expenses, etc.
In a Chapter 13, a debtor devotes all of his disposable income to a Chapter 13 re-payment plan for 3-5 years for payment of unsecured creditors’ claims. Disposable income is the amount the debtor has left at the end of the month after paying reasonable living expenses and expenses for anticipated vehicle or home repairs, medical, entertainment, etc.
The priority unsecured creditors must be paid in full through the life of the plan. Unsecured creditors, however, are only left over with the debtor’s projected disposable income over the life of the plan, which in most cases represents only a small percentage of the total unsecured debt. The non-priority unsecured creditors share the projected disposal income pro rata. Thus, the extent to which non-priority unsecured creditors are paid in a Chapter 13 case depends on the debtor’s ability to pay.
In Chapter 13, however, the court may allow separate classification and treatment of unsecured claims, i.e., the debtor may be able to pay certain unsecured debts in full through the life of the plan, in preference to other unsecured claims. Typically, classification is proposed with respect to non-dischargeable debts, such student loans and certain taxes, or debts to creditors with whom the debtor wishes to maintain good relationship.