What Happens to Secured Debt in Chapter 13 Bankruptcy?

Do you have a mortgage, car loan, or other secured debt? Find out what will happen in Chapter 13 bankruptcy.

By , Attorney · University of the Pacific McGeorge School of Law

When you file for Chapter 13, you'll have a choice for debt secured by collateral, such as your house, car, or other property:

  • keep the secured property and continue paying the monthly amount, plus arrearages, in your repayment plan, or
  • return the property to the lender.

If you keep the property, you could qualify to reduce the amount you owe through a cramdown. This article explores your options and how each works.

If you're not sure which type of bankruptcy is best for you, start by learning about the differences between Chapter 7 and Chapter 13 bankruptcy.

Surrendering Secured Property in Chapter 13

Many people choose to get out from under a burdensome mortgage or a hefty car payment. A payment that was once affordable can be expensive after a job loss or other reversal, and bankruptcy gives you the opportunity to free yourself from the secured debt.

If you make that selection, you'll return—or surrender—the collateral to the lender. Giving the property back to the bank releases the lien—the legal mechanism that allows the lender to sell the property if you default on the loan. Without a lien, the character of the debt changes from secured to unsecured debt.

All unsecured debt gets put into one pool. Your creditors receive a per rata share or percentage of your disposable income or the value of the property you can't protect with an exemption, whichever is greater.

In most cases, you'll pay substantially less than the balance owed, but not always. If you have a high income or a lot of nonexempt property, you could pay 100% of the outstanding balances.

Find out more about how much you'll pay different types of debt in The Chapter 13 Repayment Plan.

Paying for Secured Property in Chapter 13

If you want to keep the property, and you can afford to do so, you'll say so in your plan. You'll have to pay the monthly payment called for under the contract. If you're behind on your payment, you'll be able to spread out the arrearages over three- to five years.

If you qualify for Chapter 7, you can pay into a three-year plan, otherwise, the plan will continue for five years. Even so, many people who could select a three-year plan opt for five years as a way to decrease—and afford—the monthly payment.

Payment-Reducing Options in Chapter 13

You might not have to pay the entire balance on your secured debt by using what's known as a cramdown in bankruptcy. Here are some options that might apply to your property.

Erase a Junior Loan on Your Residence

If you have multiple loans on your property, and one or more is wholly unsecured—meaning that if you sold the house and paid the senior loans, no proceeds would be available to repay the junior loan—the junior loan can be classified as an unsecured debt. It will be wiped out at the completion of the plan.

Pay the Value of a Car

If you've owned your car at least 910 days, you can reduce it to its value.

Pay the Value of Real Estate Other Than Your Residence

You can also reduce the value of nonresidential real estate, such as a rental property. Most people don't take advantage of this because you must pay the entire reduced balance within the five-year plan.

Pay the Value of Any Other Property

If you've owned the property other than a car at least one year, you can reduce the amount you pay to its value.

Learn more details about cramdowns in Chapter 13 bankruptcy.

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