People dealing with high levels of debt may eventually file for personal bankruptcy. Bankruptcy proceedings protect people from collection efforts. Creditors have to stop calling. The courts usually dismiss pending debt-related lawsuits due to the automatic stay.
If the bankruptcy process is successful, the filer can significantly reduce their financial obligations and eliminate some of their debt by discharging it. The type of debt that an individual has accumulated has a direct impact on what happens during bankruptcy proceedings.
People can typically classify most financial obligations as either secured or unsecured debts. What happens to each type of financial obligation during a Chapter 13 bankruptcy?
Secured debts
Secured debts are financial obligations that have collateral property attached. The terms of the initial loan generally name the collateral property and the conditions that allow the creditor to seek control of that asset. Missing a car loan payment could result in a lender repossessing a vehicle. Missing multiple mortgage payments could put a homeowner at risk of foreclosure. During a Chapter 13 bankruptcy, filers can prevent the loss of collateral property with an automatic stay.
They may also be able to renegotiate certain loan terms with their creditors. Secured debts often received priority consideration while negotiating a repayment plan. Modifying existing loans while establishing a repayment plan can help people bring their financial obligations back into compliance and fulfill their financial obligations more easily after a discharge. Regardless of whether or not the filer asks to modify the terms of a secured debt, they typically have to reaffirm the financial obligation if they want to retain the collateral property.
Unsecured debts
Lenders attempting to collect on unsecured debts are often relatively aggressive. They may send strongly-worded letters, make regular collection calls and even file lawsuits in civil court. Unsecured debts are also subject to the automatic stay granted in a bankruptcy case. Debtors can eliminate the stress of constant collection efforts.
They typically need to include unsecured debts such as medical bills and credit card balances in their repayment plans. Once they successfully complete the repayment plan and finalize the bankruptcy in court, they may be able to discharge the remaining balance due on their unsecured debts.
There are limits that apply to both secured and unsecured debts in Chapter 13 bankruptcy cases. Those with particularly complex financial circumstances may need to review their financial obligations to ensure that they can include all of them in a pending bankruptcy case. Discussing personal financial obligations and creditor activity with a skilled legal team can help those preparing for Chapter 13 bankruptcy choose the best solutions given their circumstances.
