How Do Creditors Get Paid in Chapter 13 in Massachusetts?

Who Gets Paid

• All creditors receive some payment in a Chapter 13 bankruptcy, but the way they get paid may be different. Secured debts with collateral attached, such as your mortgage or your auto loan, are usually paid as part of your necessary expenses. Unsecured debts include credit cards and medical bills. Your unsecured debts are lumped together in a Chapter 13 plan in Massachusetts; your petition doesn't name them individually. These creditors get paid from the monthly payment you give the trustee, which is the income you have left over each month after paying your necessary expenses. Past due mortgage payments are also made through the payment you give the trustee, but your current mortgage payments are included in your necessary monthly living expenses, and you would pay these yourself.
  
  

How Much They Receive

• By law, your creditors must either receive at least 10 percent of what you owe them, or what they would have gotten if you had filed for Chapter 7 protection and the trustee sold your non-exempt assets to pay them. Exempt Chapter 7 assets vary by state; in Massachusetts, they include some equity in your primary home, tools that you need for work and, in some cases, your car. How much your creditors end up receiving depends on the amount of money you have leftover at the end of the month to fund your repayment plan. All your disposable income after necessary expenses must go to the trustee. Whatever your creditors collect by the end of your plan is all they get.
  
  

Distribution of Payments

• All your creditors receive an equal portion of your monthly payment to the trustee after the trustee takes his percentage for administering your plan. Under Massachusetts law, this is 10 percent as of May 2011. So if you have 10 unsecured debts, each creditor would receive 10 percent of what's left of your payment after the trustee takes his portion. For example, if you're paying the trustee $1,000 a month toward repayment of your debts, he gets the first $100, and your 10 creditors receive $90 each.
  
  

Tips

• Car loans and student loans are exceptions to the Chapter 13 repayment process. You must pay off the entire value of your car during the life of your Chapter 13 plan if you're going to keep it, though you'd generally do this as part of your necessary monthly expenses. You must also pay student loans in full. However, you don't have to accomplish this by the end of your plan. A portion of your monthly payments to the trustee goes to your student loans. If they're not paid in full during that time, you're still responsible for the balance after completion of your plan.