Comparing Secured Debts and Unsecured Debts
It is crucial to understand the difference between unsecured debts and secured debts in the context of bankruptcy. Unsecured debts refer to sums owed to trustees who do not have a valid lien on any collateral.
Unsecured debts include deficits, student loans, collateral loans, tax arrears, judgments, medical debts, old rent, and utility payments.
Secured debts are sums owed to trustees who hold a valid claim on collateral, such as homeowners’ loans, small business loans, mechanic's liens, and title loans. It is crucial to accurately categorize and account for unsecured and secured debts when determining debt control for Chapter 13 bankruptcy.
Failure to do so could result in an inaccurate estimate of your eligibility for a Chapter 13 discharge and your potential payment plan amount.
Which bankruptcy is Best for me, Chapter 7 or Chapter 13?
One of the most important decisions in bankruptcy is choosing between Chapter 7 and Chapter 13. You can use our free calculator to get the costs and qualification estimates for Chapter 7 and Chapter 13 bankruptcy.
Alternatives for Managing Debts Below the Limit for Chapter 13 Bankruptcy
Chapter 13 bankruptcy is an option for individuals, married couples, and self-employed individuals looking to reorganize or restructure their debts. Debtors must have a steady source of income to be eligible for a Chapter 13 bankruptcy discharge.
The Chapter 13 bankruptcy provides several benefits, including:
- Elimination of most unsecured debts
- Prevention of foreclosure on your home
- Potential reduction of car payments
- Protection of assets from being used to repay unsecured creditors.
The court only approves a payment plan based on your income and expenses. Throughout the program, lasting three to five years, you will make regular payments to the Chapter 13 trustee, who will distribute payments to your lenders. At the end of the plan, the court will discharge any remaining unsecured debt.
Alternatives for Managing Debts That Exceed the Limit for Chapter 13 Bankruptcy
You may still be eligible to file for Chapter 13 bankruptcy under certain circumstances, even if you exceed the debt limits. There are policies for reducing debts in a Chapter 13 bankruptcy.
One way to reduce debt and fall within limits is to exclude contingent debts. Contingent debts are obligations that depend on an event occurring in the future that may or may not happen. For example, if you registered a loan for someone and they can repay it, you would not be responsible for paying back the debt.
Another strategy is negotiating with creditors to lower the debt owed. You may also be able to consolidate multiple debts into one manageable payment.
Filing for Chapter 13 bankruptcy can help you get a fresh start by allowing you to reorganize your debt and make payments over three to five years.
If your debt exceeds Chapter 13 debt limits, it is vital to explore your options and determine the best way to get back on the path to financial stability.
Unliquidated debts, however, do not factor into Chapter 13 debt limits. Such debts refer to obligations that do not have a readily determinable cash value. They may include disputed debts as long as you have a valid reason for disputing the debt.
Another effective way to reduce your debt and potentially fall within Chapter 13 debt limits is to calculate the unsecured segment of your secured debts.
If the merit of the asset-securing debt is lower than the amount of the debt, the excess amount is regarded as unsecured debt and can be discharged in a Chapter 13 bankruptcy case.
Individuals with debts exceeding the limits for Chapter 13 can consider Chapter 11 or Chapter 7 bankruptcy cases. However, these cases are more complex and expensive than chapter 13 cases.
It is challenging to navigate the bankruptcy process for individuals facing large debts. In such cases, seeking the guidance of knowledgeable bankruptcy lawyers can provide much-needed support and ensure the best outcome.
Factors to Weigh Before Filing for Chapter 13 Bankruptcy
Some of the options that you may want to consider before proceeding with debt relief are:
- Credit counseling
- Budgeting and financial planning
- Negotiating with creditors
- Working with a financial advisor or debt coach.
