A Chapter 13 bankruptcy allows the debtor to set up a repayment plan that can protect items in a secured debt such as a house, property taxes, a car, and other items used as collateral. Therefore, there will always be debts that survive Chapter 13 and end up on a repayment plan. Fortunately, the repayment is usually only a portion of the debt instead of the full amount. There are three different classes of claims when it comes to Chapter 13 including unsecured priority claims, unsecured common claims, and secured claims. Before filing bankruptcy, it would be a good idea to know more about them.
Unsecured Priority Claims
Unsecured priority claims are not secured by assets, but will have precedence over general unsecured debts in a Chapter 13 plan. They are generally required to be fully paid during the course of a Chapter 13 repayment plan. These claims are typically tax debts, delinquent spousal or child support, and administrative expenses.
Unsecured Common Claims
Unsecured common claims have no priority and are not secured by assets. Some examples are personal loans, credit card debts, medical bills, and utilities. Since Chapter 13 is a repayment plan, these debts will not just go away. Using a formula based the value of your assets and income, the repayment plan will require you to pay a percentage of what is owed to these creditors. It is typically a small percentage of what was originally owed.
Secured claims are debts protected by assets. Assets are something promised as security for repayment of a loan that can be surrendered if the loan is not paid in full. Secured claims would be a mortgage on a house, car loans, and property taxes attached in a lien to the home. In a Chapter 13 case, secured claims will be required to be fully paid. However, interest rates can be negotiated during the process which can lower the amount owed and often times even the total amount owed can be negotiated.
For mortgages, many times the debtor can make the normal payments, but somehow fell behind and owes some past payments. Those past payments can be put in the Chapter 13 repayment plan to be paid off by the end of the plan, which saves the house from foreclosure and gets the debtor back on track. Property taxes will require full repayment, but spaced out over the life of the repayment plan which brings those taxes into a payable range by most debtors. Car loans are a little more detailed and depend on how much you owe, how much the car is worth, and how long ago the car was purchased.
The goal of a Chapter 13 bankruptcy is to keep your property and repay some or all of your debts through a repayment plan. In order for this to work some of your debts will survive Chapter 13 bankruptcy and be significantly reduced in order to alleviate a severe financial burden.