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What happens with unsecured debt in a Chapter 13 bankruptcy?

On Behalf of | Jan 29, 2021 | Chapter 13 Bankruptcy

In Indiana and across the United States, a worryingly high number of people are experiencing financial challenges due to the current health situation and the problems that have come about because of it. People are losing their jobs and have exorbitant medical expenses due to the pandemic. The hardship is palpable and people are fearful. Fortunately, there are alternatives to get into a stronger financial circumstance. For many, bankruptcy is a viable strategy. There may be confusion as to whether Chapter 7 or Chapter 13 are better options. Having legal guidance can assist with assessing the case.

Chapter 13 and unsecured debt

Chapter 7 – a liquidation – can clear all unsecured debt in exchange for the person’s property. That, however, is usually used by people who do not own a home or have items that are of substantial value. Homeowners should consider a Chapter 13 wage earner’s plan, but do so understanding how unsecured debt is handled. Medical expenses and credit card debt are generally unsecured and these are common sources of massive debt. The creditor does not have special rights to collect for unsecured debt under Chapter 13.

Since Chapter 13 requires there be a payment plan based on the debtor’s disposable income, unsecured debt will not necessarily be paid in full. The payment plan lasts for three to five years and the payments are sent to a trustee who distributes them accordingly. Secured debtors such as a lender who gave the person a mortgage will get their payments first with any arrearages made up. The term “disposable income” is critical with unsecured debt because that will cover as much as possible under the plan, but it will not automatically pay the entire sum back, thereby saving money. The key is whether the creditor gets as much as it would under a Chapter 7 and in most cases, it does.

Retaining property and clearing debt can be accomplished under Chapter 13

There is understandable fear and trepidation with moving forward in a bankruptcy. People who are struggling because of the pandemic and its overall impact on the economy have been making ends meet in a variety of ways, so much so that bankruptcy filings reduced significantly in 2020. Still, that cannot last forever even with unemployment insurance, stimulus checks from the government and eviction moratoriums. People who are facing the prospect of major financial problems due to various debts, but own a home and want to retain it should understand how Chapter 13 can help. A firm with experience in all aspects of bankruptcy can provide guidance and representation.