What If the Debt Is Secured?
Chapter 7 debtors with secured debts have three options for treatment of those financial obligations:
- They may surrender the secured property back to the creditor.
- They may “reaffirm” the debt, whereby they retain the property and continue to make the necessary payments.
- They may “redeem” the property by paying its fair market value in one lump sum.
Chapter 13 Reorganization
Individuals and sole proprietors of businesses are eligible to file for Chapter 13 reorganization.
As with the Chapter 7, all creditors in a Chapter 13 bankruptcy will receive a “Notice of Bankruptcy Case Filing” and 341 hearing. But unlike the Chapter 7, the purpose of the 341 hearing in a Chapter 13 is to determine if the debtor’s proposed repayment plan should be approved.
In addition to providing information about the 341 hearing, the Chapter 13 bankruptcy notice will also explain how to file a Proof of Claim and the deadline for filing. (If your account has been placed with BARR Credit Services for collection, we will gladly prepare and file a Proof of Claim on your behalf at no extra charge.)
“If you hope to make any recovery in a Chapter 13 case, you must first file a Proof of Claim with the bankruptcy court. Pay close attention to directions and deadlines set by the court to be sure your claim is received and accepted at the time of filing.”
– Ryan Frisbie, Legal Manager, BARR Credit Serviceswhite text used
As part of a Chapter 13 three-to-five-year repayment plan, the debtor must state the proposed amount to be paid to unsecured creditors. This amount will depend on the disposable income available, but it cannot be less than what the creditor would have received if the debtor had filed Chapter 7.
What If the Debt Is Secured?
Chapter 13 debtors with secured debts have three options for treatment of those financial obligations:
- They may surrender the property back to the creditor, at which point the debt becomes unsecured, and is paid along with other unsecured debt through the Chapter 13 plan (usually at a large discount).
- They may retain the property and continue to make payments “outside” of the Chapter 13 plan, just as before filing. This is only an option if there is no arrearage owed on the debt.
- They may retain the property and make their payments through the Chapter 13 plan. This option is used when there is an arrearage owed on the debt which must be included in the total plan payment.
Once the Chapter 13 plan has been approved by the bankruptcy court, claims will be paid out based on priority. For instance, secured debts are paid first, then priority debts (such as taxes and domestic support obligations), and then general unsecured debts. Proofs of Claim must be filed prior to the scheduled deadline in order to be considered for payment.
Chapter 11 Reorganization
Chapter 11 reorganization is designed for businesses that want to keep operating but need time to restructure their finances in order to pay the bills. It allows for a reorganization plan to help keep the business active while paying all the creditors over a period of time.
Chapter 11 bankruptcy is available to every business, whether organized as a corporation, partnership or sole proprietorship (and to individuals in some cases). However, because of its complexity, Chapter 11 is most prominently used by corporate entities.
Filing can be done voluntarily, or it can be forced on a business if three or more creditors file a petition with the bankruptcy court.
Once the Chapter 11 petition is filed, creditors are temporarily prohibited from attempting to collect the debt. The debtor-business then has four months to prepare a reorganization plan, though that can be extended to 18 months.