People often talk about debt like it is one single problem that can be resolved with one single solution. But the truth is that debt is typically made up of many smaller financial problems, all of which should be addressed individually in order to truly resolve debt.
Individual debts can be broken down into two categories: secured and unsecured. Each of these is handled differently when it comes to getting a loan; they are also handled differently when it comes to bankruptcy. If you are considering filing for Chapter 13 bankruptcy to pay off debt, you should be aware of what will happen to your secured and unsecured debts.
Knowing the difference between these two types of loans should help you understand why they are handled they way they are in Chapter 13. Secured loans are backed by collateral which means your lender has something they can take away from you if you default on your payments. Unsecured loans do not require collateral, but because of the risk to lenders, they typically come with very high interest rates and penalties for missed payments.
If you are looking to repay debts through Chapter 13, your payment obligations will depend on the type of debt. Priority claims, like taxes, will need to be paid in full first.
Secured claims will then be paid. The amount you must repay depends on multiple factors like whether you want to keep the collateral and when the debt was incurred. Essentially, you will repay either the value of the collateral or the full debt.
Unsecured claims will then be addressed. Depending on your disposable income and the terms of your repayment plan, unsecured debt may be paid off in full or partially. In many cases, you will not have to pay the full amount of the debt as long as creditors agree to the repayment plan and you stay in compliance with that plan.
Assessing the individual debts you are carrying is essential in determining which debt relief option to pursue. Discussing the specifics of your situation with an attorney experienced in bankruptcy and other debt relief solutions can prove to be a wise decision.