Chapter 13 bankruptcy is designed to let you keep all of your property. However, your property does play a role in how your Chapter 13 bankruptcy plays out. The amount of your nonexempt property affects how much unsecured creditors get paid in your bankruptcy. In addition, you have to keep up with your secured debt payments (like your mortgage or car loan) if you wish to avoid foreclosure or repossession.
Read on to learn more about what happens to your property in Chapter 13 bankruptcy and how it affects your Chapter 13 repayment plan.
In Chapter 13 bankruptcy, the trustee does not sell your nonexempt assets and distribute the proceeds to your creditors like in Chapter 7. (Learn about Chapter 7 bankruptcy.) Instead, you propose a schedule to pay back some or all of your creditors through a repayment plan. Essentially, you get to keep your property (including your nonexempt assets) in return for paying back a certain amount of your debts. However, the more nonexempt assets you have, the more you have to pay unsecured creditors through your repayment plan. (To learn the ins and outs of Chapter 13, see our Chapter 13 Bankruptcy topic area.)
If you file for Chapter 7 bankruptcy, the trustee takes your nonexempt property and sells it to pay your general unsecured creditors. Since you keep all of your property in Chapter 13 bankruptcy, it would not be fair to your unsecured creditors if they didn’t get paid at least as much as they would have in a Chapter 7.
As a result, through your Chapter 13 reapyment plan, you must pay your general unsecured creditors a dividend at least equal to the value of your nonexempt assets. This means that if you have a significant amount of nonexempt property, you may have to repay your unsecured debts in full. (For details on how this works, see the articles in The Chapter 13 Repayment Plan.)
If a creditor can foreclose on or repossess an asset when you default on its loan, then the creditor's deb is "secured." Examples of secured debts include your mortgage and car loan. These debts are treated differently in Chapter 13 bankruptcy than your general unsecured debts (such as credit cards or medical bills) because bankruptcy does not wipe out your lender’s lien on the property securing its loan.
If you have missed any payments on your secured debts, you must catch up on those payments if you wish to keep your property. Luckily, Chapter 13 bankruptcy allows you to cure your default on secured debts through your repayment plan. (To learn more about what happens to property that secures a debt, like your home or car, see the articles in Your Property in Chapter 13.)
Since your Chapter 13 bankruptcy does not eliminate a secured creditor’s lien, you need to continue making payments on the loan if you wish to avoid foreclosure or repossession of your property. When it comes to your mortgage, most courts require that you make your ongoing mortgage payments directly to your lender outside of bankruptcy. (Learn more in Your Home in Chapter 13.) However, for secured personal property debts such as your car loans, courts differ on whether you must pay off the debt as part of your bankruptcy plan or whether you can pay your lender directly. (Learn more in Your Car in Chapter 13.)
As long as you keep up with your regular secured debt payments (and cure any pre-bankruptcy arrears through your plan), your lender will have no reason to foreclose on or repossess your property. However, if you fall behind on your payments, your lender can ask for court permission (through a motion for relief from the automatic stay) to enforce its lien and take back the property.