If you decided to file Chapter 13 bankruptcy, you must manage your debts by submitting a repayment plan for court approval. You will need to provide monthly or bi-weekly payments in fixed amounts to a trustee, who will distribute the funds to creditors in accordance with the plan.
Claims from creditors fall into three categories: priority, secured and unsecured. Your attorney will help you understand how to manage the various claims, but following is an encapsulated explanation.
Paying priority claims
Bankruptcy law grants special status to certain debts and calls them priority claims. Most taxes, as well as the costs attached to the bankruptcy proceeding itself, are examples. The Chapter 13 plan must specify that priority claims be paid in full unless a priority creditor agrees to a different arrangement.
Handling unsecured claims
Creditors who have unsecured claims have no special rights to collect against property owned by the debtor. The plan does not have to fully pay unsecured claims so long as creditors receive as much from the Chapter 13 bankruptcy as they would if liquidating the debtor’s assets under Chapter 7.
Understanding secured claims
Creditors with secured claims have the right to take back the collateral, or property, which is currently in the debtor’s possession if payment for the claim is not made in full. In the case of certain creditors who have a secured claim, such as a home mortgage lender, payments may be made in accordance with the original payment schedule as long as the plan makes up any arrearage that might exist.
Making the plan succeed
The terms of a court-approved Chapter 13 plan bind the debtor and each creditor together. If you are the debtor, it will be up to you to make the plan work by making regular payments to the trustee. Such a commitment will require you to live on a fixed budget for an extended period of time, but your attorney will support your endeavor and ensure that your bankruptcy filing will be successful. Keep in mind that the ultimate goal is a better life unencumbered by overwhelming debt.