When you and your Utah bankruptcy attorney file for Chapter 13 bankruptcy, you will be working out a plan (a “Chapter 13 plan”) to repay a portion of what you owe your creditors over a long period of time so that you can re-gain your financial stability. The plan will be set up so that you pay the bankruptcy trustee a monthly amount which is based on a calculation of your disposable income. The trustee then distributes those payments to your creditors. Priority is given to things like domestic support obligations, and tax debt; and then to secured debts. Anything left over goes to the general unsecured creditors.
What is unsecured debt?
In the world of debt there are two basic types: secured and unsecured. Secured debt usually relates to loans you have taken out in order to buy something. The most common examples of secured debt are home mortgages, and car loans. Other things, such as computers and furniture can also be secured debt. The debt is called “secured” because it is backed by some sort of collateral that can be sold to pay off the debt if you default. Thus, you may be facing a home foreclosure, or a car repossession if you are failing to keep up with your payments to those creditors.
The other type of debt, unsecured debt, refers to debt that is not backed by any type of collateral. The most common example is credit card debt. Your bankruptcy attorney will tell you that your credit card company cannot come and take your TV and sell it in order to pay your debt to them because that debt is unsecured. There are very specific laws about secured debt, so that your property can’t be taken and sold by just anyone you owe money to.
What happens to unsecured debt?
So what happens to that unsecured credit card debt in Chapter 13 bankruptcy? Well, here is the good news: the bankruptcy code does not require any minimum payment to your credit card companies (or other general unsecured creditors) in your Chapter 13 plan! A Chapter 13 debtor will often receive a discharge after completing their plan without paying anything to their credit card companies.
Now, your situation needs to be evaluated on a case by case basis. It may be that you are required to pay a certain amount to your unsecured creditors, as a class, due to, for example, a liquidation analysis of your assets. But that is a topic for another post. For now, just take heart that your unsecured creditors are not necessarily entitled to any payback through your chapter 13 bankruptcy plan!