What may be the most significant difference between a Chapter 7 “liquidation” bankruptcy and a Chapter 13 bankruptcy is the latter’s use of a repayment plan to satisfy debts to creditors.
But what goes into crafting a repayment plan? What kinds of debts does it cover, and how long does the plan last? These, and other questions, often arise when individuals are trying to choose which kind of bankruptcy is best for them.
An important consideration for any repayment plan is that it establishes a three-tier hierarchy of debts to be repaid. The first of these debt types is the “priority” debt, consisting of tax obligations and the costs of the bankruptcy proceeding itself.
Once priority claims are accounted for, the next level of debt is “secured” debt. What distinguishes these debts is that the time the debtor incurred the debt obligation, often for a car or some other expensive property purchased using installments, the lender established a security interest under state law (such as that of New Jersey) allowing it to repossess that property if the debtor defaults.
Unlike a liquidation bankruptcy, a Chapter 13 allows the debtor to keep possession of many assets, but requires that these assets be paid for under the payment plan (although the payment amount may be only the actual value of the item instead of the full debt amount).
The final type of debt under the payment plan is “unsecured” debt, which is debt that typically is not secured by a right to repossess property. Payment of unsecured debts depends on the amount of disposable income left over after the first two tiers of debt are dealt with; as a result, unsecured debts often are not paid in full, but rather the same amount that the creditor could have expected to have received under a Chapter 7.
A repayment plan can last as long as five years. During the payment plan period, the debtor is under a number of restrictions, most notably the inability to incur new debts. Furthermore, if the debtor fails to adhere to the repayment plan, it can be nullified and the Chapter 13 converted into a Chapter 7.
This post offers only a brief examination of the particulars of how a repayment plan works. You can gain more comprehensive information on such plans by consulting with a bankruptcy law firm.