Filing for Chapter 13 bankruptcy is a powerful option for someone being overwhelmed by debt. It gives you the chance to organize your finances and prepare a plan, approved by the bankruptcy court, to deal with your debts. If you own a home which is at risk of foreclosure, Chapter 13 can help you hang onto it. Some debts may be reduced or discharged entirely, depending on the circumstances. Regardless, how those individual debts are handled depends upon how they are classified.
The bankruptcy court will consider some debts priority debts. They are moved to the front of the line and must be paid on time and in full – they cannot be discharged. Alimony, child support and some taxes are considered priority debts. There are also fees charged for the bankruptcy proceedings themselves. These fees will be given priority status and must be paid within a specified time period.
When a creditor holds a lien on property you own, the debt you owe on that property is considered a secured debt. Home loans and auto loans are common examples of secured debt. Although a bankruptcy discharge could remove your liability to pay the debt itself, it cannot remove the creditors lien on that property. As a result, if someone filing for Chapter 13 wishes to retain the property, their plan must include repayment of the underlying debt. Otherwise, the creditor can foreclose on the property.
Many debts have no collateral backing them and are considered unsecured debts. Credit cards, medical bills and personal loans are all non-priority unsecured debts. Most of the time, they can be eliminated with the bankruptcy discharge. Student loans are a big exception to this rule, however. Although it is possible to eliminate them following bankruptcy discharge, the standard for doing so is very difficult to meet.