When you file a bankruptcy, you must include all debts; however, not all debts are treated equally in a Chapter 13 case. For example, student loans and taxes (there are exceptions to this!) are non-dischargeable debts that survive the bankruptcy. This means the debtor is still legally liable for paying the student loans and taxes if the debts are not paid in full through the bankruptcy plan. Unsecured debts may only receive a percentage of what is owed and any balance remaining at the end of the repayment period is discharged forever. To complicate matters, tax claims are generally unsecured debts but they are afforded priority status and paid after secured claims but before general unsecured claims. As you can already see, secured debt and unsecured debt get treated differently in a Chapter 13 bankruptcy case, and it can be a bit confusing to comprehend. With this blog I am hoping it make it a little simpler, to give you a better idea of how your debts would be handled in a Chapter 13.
Secured Debt vs. Unsecured Debt – Defining the Terms
Secured debt – For a debt to be treated as a secured claim, the creditor must hold a valid lien against property of the debtor. This lien gives the creditor the right to be paid from the proceeds of the sale of the property, before creditors who do not have liens on the property. Examples of secured claims include mortgages, judgment liens, non-purchase money security interests, purchase money security interests, tax liens, title loans and statutory liens. In a Chapter 13 case, secured claims are not always treated equally, but they do take priority in payment over unsecured claims against that specific item of collateral.
Unsecured debt – All claims that are not secured by collateral fall into the unsecured debt category. These include taxes (if a lien has not been filed), student loans, medical bills, credit cards, domestic support obligations, cash advance loans, unsecured personal loans, etc. Any debt that is not secured by some type of collateral will be treated as an unsecured claim in the Chapter 13 bankruptcy plan. However, some unsecured debts are given priority so they are paid in full before most other unsecured debts. Priority unsecured debts include most taxes, domestic support obligations and administrative fees. General unsecured claims receive payment last in a Chapter 13 bankruptcy case.
Treatment of Secured Debt vs. Unsecured Debt in a Chapter 13 Plan
When you file a Chapter 13 bankruptcy case, you must also file a proposed plan of repayment. This plan outlines for the court and your creditors how you propose to pay your debts over the next three to five years. As discussed above, secured debts and unsecured debts are treated differently in the proposed plan. While it is impossible to cover every type of debt, below is an explanation of how the most common types of debts are treated in a Chapter 13 bankruptcy plan.
Secured Debts in Chapter 13:
Mortgages – Any arrearage (past-due payments) is paid through the Chapter 13 plan. The debtor must resume regular mortgage payments directly to the mortgage lender and remain current on all post-petition payments during the bankruptcy case.
Car loans – Typically, a car loan will be included in the Chapter 13 plan and be paid in full through the plan. This helps by lowering interest and extending the term of the loan. In some cases, the debtor can “value” the lien at the car’s current market value and only pay the creditor the value of the car. The remaining amount owed drops into the general unsecured amount.
Purchase-money security interests – If you borrow money to purchase a specific item, the lender may have a purchase money security. Examples of this type of debt are loans to purchase furniture, jewelry, appliances and some store credit cards. In the Chapter 13 plan, the creditor will receive interest at the statutory rate, which may or may not be the interest rate agreed to in your credit agreement. As with car loans, the debtor may be able to “value” the lien to lower the secured claim down to the value of the collateral.
Non-purchase money security interests – This claim against household goods exists when the money borrowed was not used to purchase the items that were pledged as collateral (the debtor already owned the items and pledged them as collateral for a new loan). Most of these liens are “avoided” through the bankruptcy so that the debtor keeps the household goods and the claims become unsecured.
Tax liens – Tax liens are secured by any real estate or personal property owned by the debtor. They must be paid in full as secured claims through the bankruptcy plan.
Unsecured debts in Chapter 13:
Priority unsecured debts – Claims that have priority status in a Chapter 13 plan. They are paid after secured claims but before general unsecured claims receive any payment. The most common types of priority claims are taxes, child support and alimony.
General unsecured debts – All debts that are not secured by collateral or granted priority status fall within this category. They are paid last and may or may not be paid in full (in most cases unsecured claims are paid only a percentage of the amount owed). Any amount that is not paid is discharged when the bankruptcy case is closed and the debtor is no longer legally liable for repayment of the debt.
Is a Chapter 13 Bankruptcy Right for You?
Schedule a free consultation with an experienced bankruptcy attorney. We will review your debts to determine the types of debt you owe (secured debt vs. unsecured debt) and then explain how a Chapter 13 bankruptcy could benefit you.