Hey folks! in my previous post, I explained the basics of the chapter 13 plan, click here to read that. Now lets get into some more detail.
Let’s keep using our example of a person who’s got a $3,600 arrearage, but we’ll make it a bit more realistic, shall we? Because no one who comes to see me about bankruptcy is behind on just one debt. There are usually some credit cards, and some medical bills mixed in. So imagine this person is $3,600 behind on their mortgage, but they’ve also got $8,000 of credit card debt and $10,000 dollars of medical bills. That means they’ve got $21,600 of debt. In a three year plan, would they have to pay all of that off, plus keep making their mortgage payment, because that would cost them $600 per month on top of their mortgage!
The good news is that is not how it works. The person in our example does not necessarily have to pay back all of credit card debt and hospital bills. In fact, in many situations they may not have to pay back any of the credit card and medical bills. This is because of the difference between secured and unsecured debts – the chapter 13 debtor must pay back all the arrearage on her secured debts, but does not necessarily have to pay back all of their unsecured debts.
A secured debt is a debt that is backed by some type of collateral. The most common examples are mortgages and car loans. Loans used to buy furniture, or for house repairs, etc may also be secured in some instances. These loans are called “secured” because the debt is secured by the item of collateral. Thus if the debtor defaults (stops paying), the creditor can sell the collateral and get their money back. That is what happens when a house is foreclosed or a car is repossessed.
Debts like pay-day loans, utility bills, medical bills, and credit card bills are not backed by any collateral, and are thus “unsecured”. In a Chapter 13 plan, you must pay all the back payments on secured debts over the life of the plan, but how much you pay to the unsecured creditors depends on your income and the plan length. Sometimes you pay nothing at all to the unsecured creditors.
Check back next time, we’ll discuss how you income affects the plan length and payment amount.
Click here to visit my website and contact me to discuss your financial trouble, I’m glad to help!