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How are debts handled in a Chapter 13 bankruptcy?

Filing a Chapter 13 bankruptcy means that you are going to repay some debts that are included in the case. Within 14 days of filing the petition, you have to file a repayment plan. This outlines how much you are going to pay and how often. These payments, which are typically bi-weekly or monthly, coincide with your pay and are made to the trustee.

Once the trustee has the funds from your payment, the money is distributed among the creditors who have claims in the matter. These are divided into three distinct types - priority, secured and unsecured. There are many differences between these.

What is priority debt?

Priority debts are those that have a special status under the bankruptcy laws. These include things like the cost of the bankruptcy and taxes. Priority debts must be paid in full by the end of the bankruptcy case unless the creditor agrees to other terms. The trustee will place an emphasis on getting these paid off before other types of debts.

What are secured and unsecured debts?

Secured debts have something that the creditor can repossess to cover the cost of the debt. Unsecured debts don't have anything that can be used to satisfy the debt. Secured debts must be paid up to the value of the item in question if the person wants to keep the asset. Unsecured debts don't have to be paid in full as long as the person is making payments to the bankruptcy trustee that are equal to their disposable income and for the entire commitment period.

It is imperative that you understand your obligation for making payments to the trustee. Failing to make these can have your case thrown out, which would stop your protections under bankruptcy laws. You should be able to get an estimate of the payments you will make prior to filing your case. Use this information to set your budget and get on your way to financial freedom.

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