The Fate of Unsecured Debt Balances in Chapter 13 Bankruptcy
If you have $394,725 or less in unsecured debt, you may be eligible to file for Chapter 13 bankruptcy. While creditors must be paid in a Chapter 13 case, you may not necessarily pay off the entire balance. In such a scenario, these balances may be discharged when the repayment period ends. Your bankruptcy lawyer can answer questions about your unsecured debt balances.
How Much Are You Required to Pay to Creditors?
The amount of unsecured debt that you are required to pay depends on the terms of your repayment plan. Generally speaking, unsecured creditors must receive at least what they would have received if you had filed for Chapter 7 bankruptcy. Of course, the amount that you have to pay each month to all creditors depends on the amount of disposable income that you have. Your disposable income is what is left over after paying for necessities like food, shelter and other basic needs.
What Is Considered to Be Unsecured Debt?
Any debt that is not labeled as secured or priority debt is considered to be unsecured in a Chapter 13 case. Priority debts include child support payments owed now or those owed in the future, back tax debt and student loan debt. Secured debts include home or auto loans where there is collateral attached to the loan that a lender has an interest in. It is important to know that secured debts may be converted to unsecured debts when filing for Chapter 13 bankruptcy.
Converting Secured Debts to Unsecured Debts
Your bankruptcy attorney may talk about the process of turning a portion of your secured debt into an unsecured one. For example, if you owe $5,000 on a car that is only worth $4,000, that extra $1,000 could be reclassified as unsecured in nature. If you have a second mortgage, the difference between the amount owed on the loan and the value of the home could be reclassified as unsecured debt. In some cases, the lien held by the second mortgage lender could be stripped entirely. Your bankruptcy attorney may be able to further explain this process and how it may be beneficial to your case.
You Must Adhere to Your Payment Plan
While unsecured debt balances will generally be discharged at the end of a Chapter 13 case, it is important to make payments to creditors in a good faith manner. This means that you must first propose a payment plan that strives to take all creditors into consideration. Once the plan has been proposed and approved by creditors, the trustee and the bankruptcy judge, you must make payments according to that proposal.
Failing to proceed with payments could get your case dismissed, which may open yourself up to foreclosure, repossession or other negative consequences. The length of the payment plan will be based on your income and assets at the time of filing. If you have relatively few assets or a low income, the repayment plan will cover three years.
What Happens After Unsecured Debts Are Discharged?
When an unsecured debt is discharged after a Chapter 13 case, creditors cannot come after you for payment. This is true whether the lender was a national bank, your employer or a family friend. However, you may still voluntarily make payments on the debt in an effort to retain relationships with friends, family members and business partners.
If you receive calls or letters from creditors or debt collectors about a debt that has been discharged, contact your bankruptcy lawyer or the court that oversaw your case. It is also a good idea to check your credit report to ensure that creditors have accurately reported information about your bankruptcy and the status of a debt.
Generally speaking, it may be easier to go through a bankruptcy proceeding with a bankruptcy lawyer. For assistance, you can contact the office of Neuner & Ventura LLP in Marlton, NJ, by calling (856) 596-2828. You can also use the contact form on our website to learn more.
