Secured vs Unsecured Debt in Chapter 13 Bankruptcy
How debts are handled in Chapter 13 bankruptcy depends on whether they are secured or unsecured -- and on whether or not they are priority debts.
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When you file for Chapter 13 bankruptcy, you must propose a repayment plan. Your repayment plan, which will last for three to five years, depending on your income and other factors, must meet several requirements:
- It must pay off all priority debts in full. These debts include child support, spousal support, and certain tax debts.
- If you own nonexempt property, your plan must pay your unsecured creditors at least the value of that property.
- All of your disposable income (as defined by law) must be paid into the plan, for the benefit of your unsecured creditors.
This article explains how these requirements work, including how to determine which category your debts fall into.
Priority debts are those that Congress has decided should, for public policy reasons, be paid off first. They include child support, spousal support, most tax debts, and the administrative costs of your Chapter 13 case (the trustee's fee and your attorney's fee, if you have one). Your Chapter 13 plan must pay these debts in full; otherwise, the court won't approve it.
Secured debts are debts that are secured by property -- that is, the creditor can take back the property securing the debt if you default. Some secured debts are voluntary agreements, such as when you get a mortgage or car note. Other secured debts are entered against you involuntarily, such as a mechanic's lien against your home.
If you have fallen behind on a debt secured by property you want to keep, you can include the arrearage in your Chapter 13 plan and repay it over time. As long as you remain current on your monthly payments going forward, you will be able to keep the property. For example, if you have missed a couple of house payments of $1,500 each, you can spread the $3,000 you owe over three to five years in your repayment plan.
If you plan to keep property securing a debt and continue your monthly payments, you can make those payments within or outside of your Chapter 13 repayment plan.
Unsecured debt is debt that's not secured by property. For these debts, a creditor can't just take your property. Instead, it has to sue you, win, and get a court judgment to initiate collection proceedings. Some unsecured debts are priority debts, and so must be paid in full in your plan (such as child support). The rest may be repaid in full or in part, depending on how much you pay into your plan. The rules are:
- Your unsecured creditors must receive at least the value of your nonexempt property. (This is what they would have received if you had filed for Chapter 7 bankruptcy). So, if you own a luxury car worth $20,000 that isn't protected by an exemption, you must pay at least $20,000 into your repayment plan, on top of what you're paying for priority debts and arrearages on secured debts, for the benefit of your unsecured creditors.
- You must pay all of your disposable income into the plan. Your disposable income is what's left after you pay allowed expenses and monthly payments on secured debt.
As long as these requirements are met, your repayment plan might pay off unsecured creditors in full, in part, or not at all. At the end of your Chapter 13 case, all debts that are dischargeable will be wiped out, whether or not the creditors received any payments under your plan.