For many Kentuckians, choosing between filing bankruptcy under Chapter 7 and Chapter 13 can be difficult. This post will examine the choice from a different perspective: the outcome of a Chapter 13 proceeding. In other words, what happens to a person's assets and debts when the Chapter 13 proceeding finally comes to an end with the entry of the order confirming the repayment plan?
The heart of a Chapter 13 proceeding is the reorganization plan prepared by the debtor. This plan provides for regular payments to the trustee, who uses the money to pay prescribed amounts to the various creditors. The plan must deal with three kinds of debts: priority, secured and unsecured. Priority claims are those claims that cannot be discharged; these claims comprise taxes, child support and similar debts. Secured debts are those debts for which the creditor may seize assets of the debtor in the event of default. Unsecured claims, such as credit card debt, are those debts which do not give the creditor an interest in the debtor's assets.
The court will examine the reorganization plan to ensure that it satisfies the requirements of the bankruptcy code. All priority claims must be paid in full; secured claims must be repaid at least to the extent that the creditor receives the value of the collateral. Unsecured debts need not be repaid in any prescribed amount, but the debtor must commit to pay a prescribed amount of disposable income to retire unsecured debts over either a 3- or 5-year period.
If the court confirms the plan, it will enter an order embodying the terms of the plan. The trustee thereafter will receive the debtor's payments and distribute the funds to the creditors as provided in the plan. If the debtor makes all payments required by the plan, all remaining indebtedness is discharged. If the debtor defaults in making the required payments, the court has the option to convert the proceeding to a liquidation proceeding under Chapter 7 of the bankruptcy code.
Source: FindLaw, "Chapter 13: Repayment Plan and Confirmation Hearing," accessed on June 17, 2017