Deciding to file for bankruptcy can be difficult, but it is not the only consideration you will have to make. You will also need to think about which type of bankruptcy you may file: Chapter 7 or Chapter 13. Your choice can depend on a variety of factors, such as the results of your means test, what assets you have and want to keep, and if your debt is primarily made up of secured or unsecured loans.
Secured vs. Unsecured Debt
There are 3 basic types of debts in a consumer bankruptcy:
- Secured Debts: These debts are actually tied to an asset, such as a car loan or a mortgage. If you want to keep your house or your car, you will need to catch up on any past-due amounts. In Chapter 7, you will need to pay off arrears and be current; otherwise, you may be able to discharge these debts through your bankruptcy. Chapter 13 may allow you to pay off amounts past due through a payment plan.
- Priority Unsecured Debts: This debt is called “unsecured” because it has no physical property attached to it; however, these debts do need to be paid off and typically cannot be discharged in bankruptcy. Examples include child support payments, court fines from criminal charges, and certain taxes. In a Chapter 7 bankruptcy, usually, you sell your assets to pay off these debts. With Chapter 13, you develop a payment plan and pay off debts over a 3-5 year period.
- Non-priority Unsecured Debts: Most non-priority unsecured debts can be discharged in either a Chapter 7 or Chapter 13 bankruptcy plan. These debts include medical bills, credit card debt, and utility bills that are past due.
Cramdowns
If you have certain secured debts that you’re trying to hang onto, a cramdown may be right for you. This payment plan allows you to “cram down” your remaining balance by the value of the asset attached to the loan. A cramdown is used in Chapter 13 plans, often for car loans – say you owe $10,000 on a car that is currently only worth about $7,000. You can propose a plan where your loan is reduced to $7,000, which you will pay off through your payment plan to keep your car. The unpaid $3,000 would be added to your nonpriority unsecured debts and may get completely discharged.
There are certain restrictions in place regarding when you can use a cramdown and what property you’re allowed to cram down; for example, you cannot use this payment method for the mortgage on your current residence, but you might be able to use it on mortgages on any investment properties you own.
Reaffirmation of Debt
Chapter 7 bankruptcy has an option for you to keep property which is a secured debt through a reaffirmation of the debt. In this case, if you decide you want to keep your car, you first need to try your best to stay current on your payments. After your bankruptcy discharge is awarded, you may decide to reaffirm your car loan, which means you agree to continue making the payments as allotted in the original agreement. Reaffirming this debt after bankruptcy reinstates your loan as if the debt were never entered in your bankruptcy. If you decide to reaffirm, you must continue making payments as stated in your contract; otherwise, your lender will still have the ability to repossess your car.
A Note about Student Loans
Student loans are somewhat unusual – they are considered a nonpriority unsecured debt, but the chances of you getting them discharged are pretty slim. While it is not completely impossible to get student loans discharged, you have to prove that paying them would pose an “undue hardship” to you and your dependents, which is a very difficult task. It’s likely that you will still owe on your student loans after your bankruptcy discharge is awarded.
Talk to a Cleveland Bankruptcy Lawyer
Speaking with skilled Cleveland Bankruptcy Attorneys Cleveland Bankruptcy Attorneys may help you get a better idea of how you can take care of your secured and unsecured loans. The attorneys at Cleveland Bankruptcy Attorneys have years of experience with both Chapter 7 and Chapter 13 bankruptcy plans; call (216) 586-6600 or email advice@ohiodebthelp.com to see what we can do for you.