Keeping Property in Chapter 13 Bankruptcy
You can keep your property in Chapter 13 bankruptcy, but you'll have to keep up with secured debt payments and catch up on secured debt arrears.
In Chapter 13 bankruptcy, you are allowed to keep all of your property. However, if you have nonexempt assets, you may be required to pay back more of your unsecured debts through your Chapter 13 plan. In addition, you must continue to make payments on your secured debts or pay them off in your plan if you wish to retain the assets (such as your home or car) securing those debts. Read on to learn more about how to keep your property in Chapter 13 bankruptcy.
The Chapter 13 Trustee Does Not Sell Your Nonexempt Property
In Chapter 7 bankruptcy, the trustee liquidates your nonexempt property to pay your creditors. In contrast, the bankruptcy trustee in a Chapter 13 allows you to keep all of your property including your nonexempt assets. In exchange for keeping all of your property, you pay back all or a portion of your debts through a repayment plan. (To learn more about how this works, see Chapter 13 Bankruptcy.)
How Does Your Property Affect Your Chapter 13 Plan?
In your Chapter 13 plan, you are required to pay off certain debts in full. These include mortgage arrears and priority debts such as certain taxes. However, the amount you pay your general unsecured creditors (such as credit card companies) depends on your income, expenses, and nonexempt property.
If you own nonexempt assets, you are required to pay your unsecured creditors at least an amount equal to their value. This means you get to keep your nonexempt assets. But in return, you must pay a higher dividend to unsecured creditors through your repayment plan. (To learn more, see The Chapter 13 Repayment Plan.)
Chapter 13 Allows You to Catch Up on Missed Secured Debt Payments
If you have pledged an asset as collateral for a loan, that loan is considered a secured debt. This means that if you fall behind on your loan payments, your lender is allowed to foreclose on or repossess that asset. The most common secured debts are your mortgage and car loan.
If you are behind on your secured debt payments, Chapter 13 bankruptcy lets you avoid foreclosure or repossession by allowing you to catch up on your missed payments through your repayment plan. While you cure your default, the automatic stay prohibits creditors from foreclosing on or repossessing your property.
You Must Continue to Pay Your Secured Debts During Chapter 13 Bankruptcy
If you wish to keep your property, you must also continue making regular payments on your secured debts during your Chapter 13. As we discussed, you can cure your pre-bankruptcy mortgage default through your Chapter 13 plan. However, you still need to make your ongoing mortgage payments during your bankruptcy whether or not you were in default. Otherwise, your mortgage lender can ask the court to lift the automatic stay and allow it to initiate or resume the foreclosure process.
Unlike a mortgage, you can usually choose to pay off your car loan (or other debts secured by personal property) through your Chapter 13 plan. Depending on where you live, certain courts actually require you to pay off these debts through your plan. However, other courts allow you to exclude debts secured by personal property from your bankruptcy.
If you are paying your secured personal property debts through your plan, all you need to do is make timely plan payments to keep your assets. However, if you choose to exclude them from your plan, you must make regular payments directly to your lender to avoid repossession.
(To learn more, see Secured Debts in Chapter 13 Bankruptcy.)