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Creditors get paid in a Chapter 13 bankruptcy according to a legal pecking order. Knowing that pecking order can improve your chances for success.
If you’re thinking about Chapter 13 bankruptcy – whether because you want to or because you don’t have any other options – you know it’s designed to repay debts over time.
You probably have more than one debt, and you want to know who’s going to get what during the course of your Chapter 13 Plan.
See Also:

• Chapter 13 May Be Your Only Option After Chapter 7 Bankruptcy
• Chapter 13 Plan Length

Here’s what you need to know about where the money goes in your Chapter 13 case.
Types Of Debts
In general, there are three major types of debts. They are:
Secured Debts: When you give collateral to a lender in exchange for borrowing money, the debt is secured by the collateral. Common secured debts are mortgages and car loans.
Priority Unsecured: Some debts aren’t secured by collateral, but the law treats them as more important than others.  Some of the more common priority debts are:

• alimony, maintenance, or support;
• some income tax debts;
• customs, duties, and penalties owing to federal, state, and local governmental units; and
• claims for death or personal injury (not property damage) resulting from driving under the influence of alcohol or drugs.

General Unsecured: When you have a debt for a credit card, personal loan, medical or dental bill, or any other obligation that isn’t secured by property or owed to the government, it’s considered a general unsecured debt. This classification is essentially a slush pile of everything else you owe.
Order Of Payments
In general, payments made to creditors in a Chapter 13 bankruptcy go in the following order:

1. Secured debts;
2. Priority debts; and
3. General unsecured debts.

Other obligations such as attorney’s fees and other administrative costs such as trustee commissions are paid through your Chapter 13 Plan as well. Some courts pay those amounts before the arrears on secured debts, whereas others pay them out over the course of your Chapter 13 Plan.
Who Gets Paid How Much?
In order for your Chapter 13 Plan to be successful, secured debts must be paid in full with interest.
In addition, all priority debts must be paid in full.
General unsecured claims are paid on a pro-rata basis. That’s best explained by example.

Let’s say your Chapter 13 Plan calls for payments of $500 per month for 60 months. That means a total of $30,000 will be paid through the Plan. If you have $10,000 in arrears on your mortgage and $5,000 due to priority creditors, there will be $15,000 left over to pay general unsecured debts.
Looking at your general unsecured debts, suppose you owe the following:

• $50,000 in student loans
• $10,000 in credit cards
• $5,000 in medical debts

Your student loans comprise about 77% of your general unsecured debt. Therefore, the student lender will receive 77% of the $15,000 left over for general unsecured creditors – $11,550.

This example doesn’t account for administrative expenses such as legal fees and trustee commissions paid through the Plan, but that’s simply to make the math easier.
The Difficulty Of Calculating In Advance
My clients always want to know how much they’ll be required to pay in a Chapter 13 bankruptcy, and understandably so. You want to have some measure of certainty, and it helps to know if you’ll be able to afford the payments required in Chapter 13.
Unfortunately, that’s not always possible.
Secured claims and priority claims, both of which must be paid in full, sometimes are uncertain when the case is filed. You may not have an up-to-date statement of the amounts due, or interest may accrue more quickly than you expect.
In addition, the interest rate on the secured claims may not be obvious when your case is filed.
For that reason, we may not always know how much you’ll need to pay over the life of your Chapter 13 bankruptcy case.
Rest assured, however, that we’ll go through the claims filed as soon as they come in so that we can get a handle on things as quickly as possible.
How Creditors Get Paid In A Chapter 13 Bankruptcy was originally published on Consumer Help Central. If you're seeing this message on another site, it has been stolen and is being used without permission. That's illegal, a violation of copyright, and just plain awful.

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com

The court in the case of In re Dominique, 368 B.R. 913 (Bankr.S.D.Fla. 2007)(Isicoff, J.) addressed the consequences of the failure of a mortgage servicer to give the required notice of an escrow account deficiency per RESPA, Florida statutes, and the provisions of the mortgage during the pendency of a chapter 13 plan. The court held that the consequence of such failure was the waiver of the escrow account deficiency.

The debtors' confirmed chapter 13 plan provided to cure the mortgagee's pre-petition arrearage and to maintain regular payments. Towards the end of the chapter 13 plan, the mortgagee demanded payment of an approximate $6,000 escrow account shortage. The mortgage required the debtors to maintain an escrow account with the mortgage loan servicer for the payment of an allocable portion of property taxes and insurance premiums. The debtors filed a motion seeking a ruling that the $6,000 escrow shortage would be discharged upon completion of the chapter 13 plan.

The court found that RESPA and its regulation require a mortgage loan servicer to do an annual escrow analysis and to provide the borrower with annual notice of any deficiency if the mortgage requires the borrower to make escrow payments. 12 U.S.C. section 2609(b), 24 C.F.R. 3500.17(c), 3500.17(f). The servicer may require the borrower to pay additional deposits into the escrow account to make up the deficiency but is not required to do so. 24 C.F.R. section 3500.17(c)(1)(ii), 24 C.F.R. section 3500.17(f)(3) and (f)(4).

The court also found that Florida law imposes a time deadline for notice of a deficient escrow account to be within 15 days after the lender receives notice of taxes due of notification of an insurance premium due. Fla. Stat. section 501.137(2). The court noted that RESPA does not generally preempt state law and does not preempt state law for purpose of the notice requirements for escrow account deficiencies. 12 U.S.C. section 2616 and 24 C.F.R. section 3500.13.

The court rejected the mortgagee's argument that it was excused from giving notice of the escrow account deficiency during the years of the plan on the claim that it would be a violation of the automatic stay as the court noted that merely providing notice of an escrow deficiency is not a stay violation. Chase Manhattan Mortgage Corp. v. Padgett, 268 B.R. 309 (S.D.Fla.2001).

The court concluded that the mortgage servicer failed to comply with Federal and Florida law in not providing annual notice of the escrow account deficiencies. The debtors requested that the court order the escrow shortage discharged. The court stated that the resolution of this issue lies in non-bankruptcy law as the escrow shortage arose post-petition. The court found the cases of In re Guevara, 258 B.R. 59 (Bankr.S.D. Fla. 2001), Telfair v. First Union Mortgage Corp., 216 F.3d 1333 (11th Cir. 2000) and Universal American Mtg. Co. v. Bateman (In re Bateman), 331 F.3d 821 (11th Cir.2003) as inapplicable to the resolution of this issue, but adopted the reasoning of the court in Padgett.

In Padgett, the court upheld the bankruptcy court's holding that the lender had waived its rights to recover post-confirmation advances for taxes and insurances as the lender failed to meet its obligations as a mortgage servicer under RESPA and the Florida notice requirement to notify the debtors of the need to increase monthly payments. In applying the Padgett decision to this case, the court held that since the mortgage servicer did not provide the annual notice as required by RESPA and Florida law as well as by the mortgage, that the right to payment was waived. The court stated that the mortgagee thereby failed to meet the conditions precedent to seeking payment and that the failure could not be cured as the involved time periods (annual or 15 day periods) had passed. The mortgage servicer was only entitled to seek the payment of the escrow shortage for the current escrow account computation year.Jordan E. Bublick is a Miami Personal Bankruptcy Lawyer with over 25 years of experience in filing chapter 13 and chapter 7 bankruptcies. Miami Personal Bankruptcy Lawyer Jordan E. Bublick has filed over 8,000 chapter 13 and chapter 7 cases.

A woman from Barron, Wis. was recently charged with counts of bankruptcy fraud that include concealing from creditors, transferring property to relatives and making a false declaration in a bankruptcy proceeding.  Cynthia Barlow, 55, was recently indicted on charges related to her bankruptcy filing that included concealing close to $19,000 while making a separate payment [...]

When hiring a bankruptcy attorney it is important to be sure that your attorney is competent to handle any and all unexpected events that may occur in your case.  The amount of Continuing Legal Education that your attorney attends is one important factor in determining his competence to handle your case.  Before hiring an attorney it is important to ask him what continuing legal education he engages is on how often he does it.
One excellent source of continuing legal education are the events put on by the American Bankruptcy Institute.

Second Chance Legal Services is a bankruptcy law firm located in Madison Heights, MI.  While we are located in Oakland County, we service Wayne, Oakland and Macomb County residents.  As Detroit Bankruptcy Attorneys we specialize in helping individuals escape their burden of debt in order to get a fresh start on their bright future.
Because of our small size our clients get individual attention.  You will have the same bankruptcy attorney throughout your case whether you are in a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy.  Your attorney will help guide you through the bankruptcy process in order to help you get a successful discharge of your debt.
It is important to note that Macomb County Bankruptcy Attorneys, Oakland County Bankruptcy Attorneys and Wayne County Bankruptcy Attorneys all deal with the same judges and trustees.  This is because all Michigan Bankruptcies are filed with the federal bankruptcy court in Detroit, MI.  For this reason, it is important that you choose an attorney not by location but rather by how comfortable you feel with them when you meet.  If you don’t feel comfortable with their knowledge, their experience or their demeanor you should seek out an attorney that you do feel comfortable with.
If you are interested in speaking with a Detroit bankruptcy attorney from Second Chance Legal Services, please contact our office at 248-629-6367 for a free initial consultation.