We’ve previously discussed some of the basic requirements for filing a bankruptcy case under Chapter 13 of the federal bankruptcy code in Illinois, including the debt limits for different types of debt, and the fact that the debtor should not have failed to appear or comply in a similar case in the prior 6 months. We’ve also touched on some of the differences between a Chapter 7 filing, which is sometimes called a ‘liquidation,’ and a Chapter 13 restructuring of debt.
Since Chapter 13 is often used by debtors to hold on to certain property they might otherwise be required to sell or give up to a creditor to satisfy a claim, it is important for those considering it to understand that there are different types of creditors. The bankruptcy law places creditors, or the entities to which the debtor owes money, into three basic categories, and these categories determine how the debtor’s repayment plan must be structured.
The first category of creditor is ‘priority.’ Debts held by priority creditors usually have to be paid off completely, as they are entities with special status, such as governments that are owed taxes, or a court that needs to recover fees. The second class of creditor is known as ‘secured.’ These creditors are owed money that is guaranteed by some form of property. The most common types of these are banks holding home mortgages or car loans. These creditors generally need to be paid at least the value of the property used as security, if the debtor wishes to keep the property (if the property was purchased in fairly close proximity to the bankruptcy filing date, the debtor may have to pay the full amount borrowed, which may be higher than the property’s ‘value’ due to depreciation.) Finally, there are ‘unsecured’ creditors, who may not have to be paid any certain amount, or even at all, provided that the repayment plan requires the debtor to pay all ‘disposable income’ and these unsecured creditors are receiving at least as much as they would under a liquidation.
Determining the category a creditor falls into and in what amount each needs to be repaid can be a difficult and complicated process if the debtor wants to ensure that his or her repayment plan is accepted by a Chapter 13 bankruptcy court. Those Illinois residents who think this may be the right move for them may wish to consider consulting an experienced bankruptcy attorney.