How does a Chapter 13 bankruptcy work?

The main purpose of a Chapter 13 bankruptcy is to consolidate debt and stop foreclosure or repossession. It extends payments over a longer length of time to allow a debtor to pay an amount he or she can afford monthly. Creditors may not pursue collection actions or asset seizure while a debt is in an active bankruptcy. Payments are calculated on either a three or five year plan. The goal is for all accounts to be current and in good standing at the completion of the Chapter 13 plan.

Once a Chapter 13 bankruptcy petition is completed and filed, a bankruptcy trustee will be assigned to the case. It is the Trustee's job to analyze all listed debts to determine status, type of debt, and validity. The debts will be separated by type. First in line for payment are priority debts. These include items such as tax debt or child support. Next in line are the secured creditors. These will include items such as mortgages or car notes. In other words, a secured creditor is one who holds a debt that is secured by some form of collateral. Debtors may also choose to surrender collateral, such as a vehicle, in satisfaction of a secured debt. If that creditor then chooses to file a claim for a deficiency balance, it becomes an unsecured debt.

Third, unsecured creditors are taken into account. However, these creditors are only allowed to receive monthly payments based on how much is left each month after both priority and secured payments have been made. Unsecured debts are paid a percentage of what they are owed. While it is possible that they will still receive 100% of the balance owed, it is not common. Plan percentages may range from zero to 100 percent based on how much income the debtor has. Any balance leftover on an unsecured debt once a debtor has completed a Chapter 13 plan is discharged and no longer owed.

Chapter 13 plans are complicated. An experienced bankruptcy attorney will be able to explain how it works, and walk you through the process step-by-step. There are multiple issues that may arise throughout the course of a plan. Having a bankruptcy attorney to call at any time for advice is priceless as you navigate your way through the process.

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