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Chapter 13: are all debts treated the same?

You earn a decent income. You own assets of value. Despite having outstanding loans, you have significant equity in those assets. The problem is that your company has not paid bonuses the last couple of years, you just returned to work due to a serious accident or maybe your wife is battling a serious illness.

The long story short is that you are having trouble paying your bills in full and on time, and you are starting to feel the repercussions. You have received a few past-due notices, collectors have started calling and you may have been notified that your wages will be garnished.

If this sounds like you, you may have done some research and found that Chapter 13 bankruptcy could be the best solution. It allows you to stop collection actions, like wage garnishment, and reorganize your debt into a repayment plan that is manageable under your current financial circumstances.

Is all debt treated the same under Chapter 13? The answer is no. There are three types of claims or categories of debt.

  1. Priority: This is the first type of claim or the debts that you will have to pay in full. There are limited exceptions to this rule, like when a creditor agrees to accept less than full payment of the debt. Bankruptcy court costs, certain taxes and child support obligations fall under this category known as your "nondischargeable debts."
  2. Secured: These are debts that are secured by collateral such as a home with a mortgage. Payback of the debt depends on your intent for the property. If you want to keep your home, for instance, you will still be liable for the mortgage. Bankruptcy allows you to bring the mortgage current and gives you time to work with your lender for a modification.
  3. Unsecured: These are debts that are not secured by collateral, like credit card or medical debt. Your Chapter 13 reorganization plan must address unsecured debt, using "disposable income" or the money that is left over after reasonable necessary expenses to pay the debts. After successful completion of a plan, you can discharge these debts.

There are three basic types of claims, but your financial situation is unique as will be your Chapter 13 plan. It is crucial that you create a plan that will work for you and the court will approve.

Like any other legal process, creating a complete plan is easier said than done. "Speak with an experienced attorney," may be a familiar marketing statement, but it still holds significant weight.

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