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What are the features of a Chapter 13 repayment plan?

On Behalf of | Sep 21, 2015 | Chapter 13 | 0 comments

One of the biggest differences between a Chapter 7 bankruptcy and its Chapter 13 counterpart is the latter’s reliance on a repayment plan. This post will cover what goes into such a payment plan.

Any repayment will include a three-level classification of debts. The first consists of “priority” debt, which includes tax obligations as well as costs of the bankruptcy proceeding.

After priority claims are met, the next debt class of debt is “secured” debt. These debts are distinguishable by the arrangement that the lender establishes a security interest in the subject matter of the debt that will allow it to repossess the property upon default. These security interests are established under state laws, such as those of Kentucky. Unlike a Chapter 7 bankruptcy, Chapter 13 lets the debtor to retain possession of many assets, but it requires that they be paid for under the payment plan. The amount of payment under the plan, though, might be the actual value of the item instead of the full amount of the debt.

The last class of debt is “unsecured” debt. This represents debts that are not secured by a repossession right. Payment of these debts depends on how much disposable income is left after the first two debt classes are taken care of, thus unsecured debts often are not paid in full. Instead, payment of these amounts is often the same as what the creditor could have expected under a Chapter 7 bankruptcy.

A repayment plan can be as long as five years in duration. During this period, the debtor remains under certain restrictions, significantly a prohibition on incurring new debt. In addition, if the debtor fails to comply with the repayment plan, then the plan can be nullified and the Chapter 13 bankruptcy converted to a Chapter 7.

This post provides only an introduction of the particulars of how a repayment plan works. You can gain more comprehensive information on such plans by consulting with a Kentucky bankruptcy law firm.