Chapter 13 bankruptcy allows a borrower to get current with things like house payments, stretch out other debts for several years, and still receive an eventual discharge of eligible debts. It can be a lifeline for many Americans struggling with a range of financial problems. However, it's also more complex than standard Chapter 7 bankruptcy.
One key area to understand as you embark on a Chapter 13 repayment plan is how to deal with the three categories of debt obligations it creates. Here's what you need to know about each.
Secured debt is debt that is attached to an asset that is considered collateral. This is your house payment, car payment, or boat payment. Chapter 13 repayment plans permit you to continue to pay secured debts if you choose to and are financially able to.
If you wish to reaffirm a secured debt and keep the asset, you must demonstrate that you can reasonably afford to do so. This includes paying any arrears as part of your three- or five-year repayment plan. If you cannot pay that arrears, you may not be allowed to reaffirm the original loan.
Certain types of debt must be paid before your creditors are paid. These debts, known as priority claims, have a claim on your disposable income that supersedes other debts. They skip to the front of the line. They also generally do not receive a discharge at the end of the payment plan.
Priority claims include student loans, child or spousal support, bankruptcy fees, taxes, and some types of court judgments. These are factored into your repayment plan calculations by being deducted after deducting your necessary living expenses. What remains then goes toward both secured and unsecured debt.
The least prioritized debt is unsecured debt. This consists of your credit cards, payday loans, personal loans, signature loans, loans from friends or family, and medical or retail bills.
It is these unsecured debts that comprise your repayment plan, along with any arrears you owe for a secured debt you reaffirmed. There may be enough left after both secured debt and priority debt to pay everything you owe to these lenders — but your remaining disposable income is often not enough. What you don't pay back is generally discharged when you exit your bankruptcy.
Where to Start
Which types of debt do you have? Do you want to reaffirm a secured debt? Do you have priority claims which limit your choices? And how much of your unsecured debt would be discharged? Find out by meeting with a bankruptcy attorney in your state today.