Hopefully you have read our prior blog titled “How Filing Chapter 7 can Improve your Financial Life” to learn the benefits of Chapter 7 cases. This blog will discuss the Chapter 13 process and how a plan of reorganization can benefit you.
When you file for bankruptcy protection under Chapter 13, you must have a routine source of income to fund your plan of repayment. Your Chapter 13 plan will outline how you intend to repay your creditors all or a percentage (0-100%) of what is owed to them. The law requires your Chapter 13 plan to last a minimum of three years and a maximum of five years. Finally, you will be required to make monthly payments to the Chapter 13 trustee who will distribute the payments to your creditors as set forth in the plan.
Drafting a Chapter 13 plan can be confusing, so it is wise to seek the assistance of an experienced bankruptcy attorney. Each type of debt you owe falls within one of three primary classifications, which are:
- Priority claims. The law grants certain types of debt special priority, which means they must be paid in full. The most common type of priority claim is specific taxes.
- Secured claims. If you have pledged assets as collateral to your lender, the loan is considered a secured claim. The most common types of secured claims are home mortgages and vehicle loans. In order to keep the assets you have pledged as collateral, you must pay the secured lender at least the value of the collateral.
- Unsecured claims. The majority of most individuals’ debt is unsecured debt such as credit card bills and medical bills. An unsecured creditor is any party that you owe money to that does not have collateral pledged to secure the loan. Unsecured claims can be paid in full, partially, or not at all as long as the debtor is paying all of his or her projected “disposable income” to pay creditors over the applicable commitment period. The law also requires that an unsecured creditor be paid as least as much as the creditor would have been paid if you had file a Chapter 7 case.
Chapter 13 bankruptcy is not an indicator of failure. In fact, it is actually a method by which you can lay the foundation for a better, brighter financial future for you and your family.