Debtors considering Chapter 13 bankruptcy protection face a more complicated bankruptcy case than those who simply opt for one-time liquidation through Chapter 7. One part of Chapter 13 which can cause confusion and complexity is the way that debts are divided into three important categories. Understanding these categories and what they mean for you is one key to success in your bankruptcy case.
To help you out, here's a short guide to the three debt types.
1. Priority Debt
In every bankruptcy case, some types of debt are not eligible for discharge. In Chapter 7 (or, liquidation) cases, this debt is basically ignored as it's not part of the case. However, Chapter 13 cases must continue to service and pay this debt. Priority obligations generally include child support, arrears on support, some tax bills, and administrative fees for the case.
Even though you don't get to discharge priority debt, it can still help your overall finances. The reason is that when more of your income goes toward these nonnegotiable debts, you may end up with more unsecured debt being discharged at the end of your payment plan.
2. Secured Debt
The way in which secured debt is handled differs significantly between Chapter 7 and Chapter 13. Many debtors who choose Chapter 13 do so because they can keep their home, car, and possibly other mortgaged assets. In fact, Chapter 13's repayment plan arrangement may help you do this because you can often bring past-due debts current by spreading them out over the three- or five-year payment plan.
However, keeping secured assets isn't mandatory either. You can opt to give them up even if you go with Chapter 13.
3. Unsecured Debt
Finally, unsecured debt may or may not be fully paid back. It is this type of debt — things like credit cards, medical bills, retail store debts, and personal loans — which makes up the bulk of the repayment plan.
You get to design the payment plan using guidelines set up by the court, but you must show that you are making your best effort to pay as much of these unsecured debts as possible. In return, remaining unsecured debts at the end of the period will be discharged. This may include a little or a lot of your debt.
One unusual element of the unsecured debt category is the handling of student loans. For bankruptcy purposes, they are treated the same as unsecured debt. However, the remaining balances aren't discharged at the end of the case. You may get relief from debt payments during the plan, but keep in mind that normal payments resume afterward.
Where to Learn More
How do your debts fit into these categories? What kind of repayment plan would you be able to make? And how much permanent relief would you receive in Chapter 13? Learn more by meeting with a Chapter 13 bankruptcy attorney in your state today.