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How is secured debt handled in Chapter 7 and Chapter 13?

Debtors remain responsible for secured debts when bankruptcy concludes

Secured debts, those that are tied to tangible assets, are included in a bankruptcy filing. But they are not discharged as unsecured debts are when the case ends. That practice may confuse some filers who believe their slate is cleaned of all debts when a bankruptcy concludes.

Whether they seek relief in U.S. Bankruptcy Court under Chapter 7, a liquidation process, or Chapter 13, in which creditors are paid in installments over several years, secured debts remain the responsibility of debtors. In Chapter 7, the most common form of bankruptcy, most debtors are able to keep major possessions - their home, vehicle and personal belongings - because they are likely to be covered by state and federal exemptions.

However, mortgage and car payments must be paid by people involved in bankruptcy or they risk losing their property. The one protection is that assets already subject to creditor collections and lawsuits are held in abeyance with an automatic stay issued by the court for the duration of the case.

In addition, there are several types of unsecured debt for which people are responsible after the Chapter 7 discharge. Any owed child support and alimony, student or other government loans and debts or fines that result from delinquent or illegal behavior will not be cleared away through bankruptcy. Debts that an individual forgot to list in the bankruptcy will not be discharged unless the creditor learns of the case and notifies the court.

Property taxes generally are not discharged, but some federal taxes can be as long as they meet specific conditions.

Chapter 13 handling of secured debts

Unlike the Chapter 7 filer who must sell property that isn't covered by exemptions, those who file Chapter 13 may keep their property while they pay off creditors for three to five years through a court-ordered repayment plan. During that time, the property is protected by the court from foreclosures and collection efforts as creditors are paid in monthly installments.

When Chapter 13 filers complete their payment plan, any remaining unsecured debts such as medical and credit card bills are discharged as they are in a Chapter 7 action.

The handling of back payments for homes, cars and other exempt property is handled differently in Chapter 13 from a liquidation bankruptcy. Once a Chapter 7 bankruptcy ends, debtors must pay what is owed on their exempt property or face losing it.

For Chapter 13 filers, payments on assets are included in their monthly installments to allow them to catch up on past due amounts so they are current when the court action concludes. If a balance remains at the end of the repayment period, the debtor is responsible for paying it. Debtors should also understand the difference between debts and liens placed on their property. While a bankruptcy may discharge a debt, it will not eliminate a creditor's lien filed against the asset. If the lien remains after the bankruptcy ends, the creditor may be able to repossess the property.

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