Many people pursuing personal bankruptcy focus on the end of the process. Their goal is to discharge unsecured debts so that they don’t have to spend years paying off old hospital bills or a seemingly insurmountable credit card balance. Quite a few unsecured debts may be eligible for discharge in a personal bankruptcy filing.
In Chapter 13 bankruptcies, in particular, a filer may also have valuable assets in their name that they want to protect. Some of those assets may have secured loans attached. Real estate and vehicles are common collateral property used for secure loans.
What happens to secured debts in a Chapter 13 bankruptcy case?
Filers can potentially renegotiate their loans
A Chapter 13 bankruptcy typically involves a multi-year repayment plan. The filer commits the majority of their disposable income to making regular payments. They then get to discharge what remains on their eligible unsecured debts.
Their secured debts are typically not eligible for discharge unless they first surrender the collateral property. Most people do not want to give up their homes or vehicles when they file for bankruptcy. Instead, they may reach out to their lenders to renegotiate their loans.
A pending Chapter 13 bankruptcy can be a powerful motivator for a financial institution to work with a borrower trying to regain control over their finances. People may be able to increase how long they have to repay the debt, which can reduce what they pay every month. They may be able to lock and lower interest rates or turn a variable loan into a fixed-rate loan.
In cases where lenders are open to negotiations, filers can potentially avoid missing or falling behind on payments again. Once they complete their repayment plan, it may be even easier to keep their secured lines of credit in good standing.
They should have more income to apply toward those debts after the discharge of their eligible unsecured debts. It is also worth noting that those at risk of vehicle repossession or foreclosure could potentially temporarily prevent those actions with the automatic stay that the courts grant when they file their initial paperwork.
Understanding how Chapter 13 bankruptcy affects different debts can be beneficial for those who have fallen behind on their financial obligations. Mortgages and car loans often require careful consideration when preparing for bankruptcy.
