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How payment plans work in a Chapter 13 bankruptcy

For anyone considering bankruptcy as a form of debt relief, an important early question is whether to choose Chapter 7 "liquidation" bankruptcy or Chapter 13 "payment plan" bankruptcy. While Chapter 7 discharges many debts completely, it may still leave some of your more valuable forms of property, such as a house, or a car, open to the possibility of being sold off in a trustee’s sale as a means of paying creditor claims.

But you may be like many people who would rather keep such high-value assets. In this situation, a Chapter 13 bankruptcy, and its defining characteristic, the payment plan, may be a better option.

In a Chapter 13 bankruptcy, you will have 14 days after filing the petition to submit a payment plan for approval by the bankruptcy court (although this period may be extended if the court grants an extension of time). Under the plan, instead of making payments directly to creditors you submit the payment installments to the bankruptcy trustee. The trustee then allocates funds from the payments among your creditors, based on their priority status. Note that even if the plan has not yet been approved by the bankruptcy court, you still need to start making plan payments to the trustee no later than 30 days after filing your bankruptcy petition.

Creditor claims against the payment plan fall into three classes of priority:

  • Priority claims, usually connected with tax obligations or bankruptcy court costs. These typically must be paid in full.
  • Secured claims, consisting of debts against which the creditor has a security or collateral interest in the property. Mortgages and car loans are common examples of secured claims.
  • Unsecured claims, which are debts having no collateral or other security interest.

Secured claims ordinarily need to be paid an amount at least equal in value to the collateral that secures the debt. Home mortgages may continue to be paid according to the time schedule of the mortgage, which may last longer than the duration of the payment plan. You must also still bring any payment arrearages current.

Unsecured claims often will not be paid in full, but as a general rule they must still receive from the payment plan at least the amount that they would have received if you had chosen Chapter 7 instead of Chapter 13.

If you have any questions about how a Chapter 13 payment plan might work for you in Kentucky, a good starting point for information is to either check with the nearest U.S. Bankruptcy Court or a law firm that practices in bankruptcy law.

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