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In Chapter 13, what are priority, secured and unsecured debt?

Salem residents who are experiencing financial challenges need not be embarrassed or frightened of the prospects of Chapter 13 bankruptcy. Chapter 13 is specifically for people who have income and will be able to formulate a plan to repay some or all of their debts. However, there are many aspects to a filing of Chapter 13 bankruptcy that must be understood before moving forward.

The types of claims in a Chapter 13 bankruptcy are priority, secured and unsecured. With priority claims, bankruptcy law will grant special status. Included are most taxes and the costs of the proceeding itself.

With secured claims, the creditor will have the right to take back certain properties -- the collateral -- in the event that the debtor fails to pay the underlying debt. Unsecured claims are those that the creditor does not have right to collect against property owned by the debtor.

Priority claims must be paid in full as part of the Chapter 13 plan. It is possible that the creditor might agree to a different treatment of the claim. If the debtor is obligated to pay domestic support, the debtor might be contributing all of his or her disposable income to a five-year plan to pay back the creditors. Under these circumstances, the priority claims might not have to be paid in full.

Debtors might want to keep the collateral that was used as security. If that is the case, the plan must include a way for the holder of the claim to receive, at minimum, what the collateral is worth.

With something like a car loan, the secured claim will have been used to purchase the collateral. In that case and if the debt was incurred at certain points prior to filing for Chapter 13, the plan will have to include full payment of that debt and not just the value of the collateral. When paying back secured creditors, such as mortgage lenders, the payments can be made as the original loan stipulated and this might go beyond the Chapter 13 plan.

Unsecured claims do not have to be paid in full, as long as the debtor will pay all of the disposable income over a specific period of time, and if the unsecured creditors will get at least what they would have if there was a liquidation. Those who have questions about filing for Chapter 13 bankruptcy should seek legal help with understanding all the minute details, such as priority, secured and unsecured debt.

Source: USCourts.gov, "Chapter 13 - Bankruptcy Basics -- The Chapter 13 Plan and Confirmation Hearing," accessed on March 14, 2016

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