When a person has to consider bankruptcy, Chapter 7 may seem preferable to Chapter 13. The reason is that Chapter 13 involves a repayment plan, while Chapter 7 might eliminate more debts.
However, Chapter 7 is not available to everyone considering bankruptcy. Also, Chapter 13 can help a filer protect valuable assets, and the process does impact or eliminate various debts.
Chapter 13 and unsecured debts
Unsecured debts are loans that a person does not back up with collateral. The most common forms of unsecured debt tend to be credit cards and medical bills.
Many Chapter 13 filings can discharge a portion of a person’s unsecured debts. In some cases, a person may not have to repay unsecured debts at all, but creditors have the option of objecting to such a repayment plan.
However, the debtor could pass a disposable income test, which means the individual does not have enough money after paying for necessities and other bills to cover the unsecured debt within the repayment period. Consequently, the person could still discharge those debts.
Repayment of secured debts and priority claims
Mortgages and car loans are examples of common debts that a person secures with collateral. Under Chapter 13, the debtor must make these obligations current to avoid foreclosure or repossession. Still, the repayment plan makes it easier to catch up.
Also, debtors must repay priority claims when filing for Chapter 13. These claims include court costs, recent income taxes, spousal maintenance, child support and unpaid wages. However, some debts that resulted from divorce, older tax obligations, fines and penalties may be unsecured debts that the person can still discharge.
The optimal way to handle a bankruptcy varies by individual. Those considering filing for Chapter 13 should do significant research to make practical decisions for their financial future.