Take advantage of the laws about the different types of debts to pay those you need to pay, while being protected from all creditors.
Your Chapter 13 payment plan has to treat debts that are legally the same type of debts essentially the same way. But your plan can and must treat different types of debts quite differently. You can use the laws that relate to this to your advantage in many, many ways. Today we begin showing how this works with each of the three major types of debts.
A secured debt is one which the law ties to something you own. The secured creditor has rights against that property you own. Those rights usually include to repossess or foreclose on the property if you don’t pay the debt.
For example, your home mortgage(s), unpaid property taxes, judgments with liens on your home, income tax liens can all be debts secured against your home. And your vehicle loan is secured against your vehicle.
A debts may be a secured one because you had directly agreed for it to be secured, like a vehicle loan. But debts can also turn into a secured one involuntarily by certain creditors in certain circumstances. An involuntary example is an income tax lien on your home.
Secured creditors have rights against whatever property of yours secures their debt. That gives them leverage in a Chapter 13 case if you want to keep that property. You usually have to pay part or all of the debt to keep the property.
If you want to keep the property securing the debt, and it’s something reasonably necessary for you to keep (like your primary vehicle or your home), that creditor leverage actually helps you. It usually allows you to favor that creditor over most of your other creditors. This means that you can pay your secured debt ahead of or instead of most other debts.
For example, you can usually catch up on a vehicle loan in your Chapter 13 plan ahead of paying your unsecured credit cards. Often as a result you pay your vehicle loan in full while only partially paying your credit cards. Sometimes the credit cards (and other such unsecured debts) get nothing at all.
Priority debts are simply those which the law say are worthy of more favored treatment over other debts. Each type of priority debt has a particular reason for being treated specially.
Some of the most common and important priority debts for consumers are child and spousal support and recent income taxes. Support obligations are special because of the hardship nonpayment tends to cause. Taxes are special because their nonpayment hurts everyone.
In a Chapter 13 payment plan, you must pay priority debts in full before paying other unsecured creditors anything. As with secured debts, you usually want and need to pay your priority debts. Those secured debts may well have been your main reason to file a Chapter 13 case, because it protects you while you pay your priority debt(s).
As with secured debts, paying your priority debt(s) ahead of other unsecured debts means those other debts get less, and sometimes nothing. You are essentially paying the priority debts to the detriment of your other debts.
General Unsecured Debts
This third type includes everything else. These are debts that have no rights to anything you own, and are not on the list of priority debts.
A Chapter 13 plan may pay general unsecured debts anything from 0% of what you owe them to 100%, depending on the circumstances. How much you pay your general unsecured debts depends on many factors. Broadly speaking, these debts receive payment of whatever money remains after you pay the secured and priority debts.
In Chapter 13 you and your bankruptcy lawyer have to follow a detailed set of rules about treatment of creditors. But those rules come with a certain amount of flexibility. The rules give structure to a Chapter 13 plan. The flexibility can help make it work to fit your unique personal circumstances.
We’ll show specific ways that these somewhat flexible rules can help you in our next few blog posts.