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Chapter 13 bankruptcy: Who gets paid?

Anyone can hit a rough patch in their financial well-being, and sometimes those difficulties can arise in the blink of an eye. An unexpected illness, the sudden loss of a job, and even divorce can throw an individual into a financial tailspin. As scary as that may be, there are safeguards in place that these individuals can take part in to obtain debt relief. Amongst these options is Chapter 13 bankruptcy.

There is a lot to understand when it comes to filing for bankruptcy, but perhaps the most important is how debts are handled. Under Chapter 13, a bankruptcy filer must submit a repayment plan within 14 days of the petition's filing. Typically, these plans set up bi-weekly or monthly payments to a trustee, who then distributes the funds to creditors based on their type of claim.

There are three types of claims. First is priority claims. These claims are given special treatment and status by the courts and include taxes and bankruptcy proceeding costs. Second is secured claims. These are debts that are backed by collateral. Unsecured claims are debts not supported by collateral.

Priority claims must be paid first and in full. After that, repayment depends upon whether the petitioner wants to keep his or her property that serves as collateral. If he or she does, then, at a minimum, the value of the collateral must be repaid. However, if the collateral is directly tied to the debt, such as a car loan, then simply paying the value of the collateral is not enough. Unsecured claims do not have to be paid back in full, and instead can only be paid with a filer's disposable income for the payment plan's period.

This post just scratches the surface of bankruptcy issues. This means that in order to ensure their claim is filed properly and they are treated fairly throughout the process, those facing overwhelming debt might want to consider acquiring the assistance of a qualified attorney.

Source: U.S. Courts, "Chapter 13 - Bankruptcy Basics," accessed on Nov. 16, 2015

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