What Is A Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy case is referred to as a reorganization bankruptcy or a wage-earner plan. Some debtors can pay some or all their debts if their creditors would work with the debtors to accept a reasonable plan to reorganize their debts. Unfortunately, creditors are more interested in getting their money than helping individuals. Therefore, the Bankruptcy Code includes a chapter of bankruptcy that allows debts to propose a reasonable plan to reorganize debts.
Once approved by the court, creditors must accept the terms of the plan. The plan prevents creditors from taking certain actions to collect debts during the bankruptcy case. While creditors may object to certain terms in the plan, a creditor cannot simply choose to “opt out” of a Chapter 13 plan.
What Is Included in A Chapter 13 Plan?
You include all your debt in your Chapter 13 plan. You cannot choose to leave out specific debts just like creditors cannot choose to opt out of your plan. However, debts are handled in different ways.
Secured Debt
A secured creditor holds a debt that is secured by collateral, such as a mortgage, car, or other assets. Secured creditors must be paid through the plan or outside of the plan. Failure to pay the debt may result in the court modifying the bankruptcy stay to allow the creditor to proceed with a foreclosure or repossession.
However, some secured debts may not be paid in full. In some cases, motions may be filed to “value” the lien at the fair market value of the collateral. For example, the loan on a vehicle may be reduced to the market value of the vehicle. With very limited exceptions, a motion to value is not allowed for liens secured by real property.
Unsecured Debt
The debt owed to an unsecured creditor is not secured by collateral. Examples of unsecured debt include medical bills and credit card debt. Unsecured creditors are paid a percentage of their debt through the Chapter 13 plan. In most cases, unsecured creditors receive pennies on the dollar. Upon completion of the plan and receipt of a bankruptcy discharge, the debtor isn’t required to pay the remaining balance owed to an unsecured creditor. The debt is discharged, and the unsecured creditor is barred from taking any action to collect the amount from the debtors.
Some unsecured debt is non-dischargeable. For example, most student loans are non-dischargeable in bankruptcy. What this means for the debtor is that he or she will continue to owe the student loan after the bankruptcy case is closed if the student loan is not paid in full through the bankruptcy plan.
Unsecured Priority Debt
Some types of unsecured debt are treated differently in a Chapter 13 case. These debts must be paid in full through the Chapter 13 plan because they are non-dischargeable. Examples of unsecured priority debt include most taxes, child support, alimony, and restitution. Provisions must be made in the Chapter 13 plan to pay unsecured priority debt in full before the plan is completed. If not, the debtor continues to owe these debts after the bankruptcy case is closed.
Can Chapter 13 Stop Foreclosures and Repossessions?
Yes, filing a Chapter 13 bankruptcy case stops foreclosures and repossessions. Once a bankruptcy case is filed, the provisions in the automatic stay prevent creditors from taking any action, including repossessing or foreclosing on an asset, without prior court approval.
A Chapter 13 case can potentially save a home and a car, even if the creditor is on the verge of seizing the asset. However, the Chapter 13 plan must make provisions for the past due payments to be paid through the plan. In the case of a mortgage, the debtor must also resume making regular mortgage payments directly to the lender outside of the plan. If the debtor fails to make the payments to the mortgage company or becomes behind on plan payments, the lender may be allowed to continue the foreclosure.
Do You Need Help with Debt?
If you are in debt or facing repossession or foreclosure, seek the advice of an attorney who understands bankruptcy law and who can advise you on your options for resolving your debt problem.