All secured debts need to be dealt with in Chapter 13 cases and need to be addressed in Chapter 13 plans. There are several options in dealing with secured debt in a Chapter 13 plan. If the debtor wants to keep the property, the debt can be paid outside of the plan, the debt can be paid through the plan or the secured lien can be stripped or removed from the property and then treated as a general unsecured debt. If the debtor wants to surrender the property, the property can be surrendered to the creditor, sold by the creditor to satisfy the debt and then any deficiency will be treated as a general unsecured debt.
If the debt is paid through the plan it may be eligible for “cram down” treatment. A “cram down” is discussed below. Debt that is not eligible to be “crammed down” may also be paid through the plan. There may be some distinct advantages to paying debt through the Chapter 13 plan. Often times the debtor can reduce the amount owed, the interest rate and the overall payment on the debt. For debt that is paid through the Chapter 13 plan, the debtor no longer makes any direct payments to the bank. Instead the debt is paid to the creditor indirectly through the plan.
Some secured debts are paid directly by the debtor to the creditor. These are secured debts that are paid outside of the Chapter 13 plan. The terms of these debts (which include interest rate and payment amount) remain the same as they were prior to the filing of the Chapter 13 case.
Some debts are paid both through the plan and outside of the plan. This is normally the case with mortgage debt where the debtor is behind on the payments at the date of filing. For mortgage debt, the debtor generally makes the ongoing payments directly to the creditor while any mortgage arrears (back payments due at the date of filing) are paid through the Chapter 13 plan.
Some secured debt is eligible to be stripped and removed from the title of the property. This is commonly done with second mortgages, third mortgages and judgment liens on homes. Stripping eligible debts from title can place the debtor in a much better financial position. Once stripped, these debts are treated as general unsecured debts.
If a debtor wants to surrender the property that is secured by a secured debt, the debtor can accomplish this through the Chapter 13 plan. This is usually done with homes or vehicles where the debtor no longer wants to keep the property and deal with the underlying debt obligation. Once the property is surrendered in the plan, the debtor must surrender possession of the property to the creditor. In the case of vehicle loans, the creditor will generally repossess the vehicle. With homes, the creditor will usually foreclose the property. Once the property is repossessed or foreclosed and sold at auction, the creditor can file a general unsecured debt in the Chapter 13 case for any deficiency of the secured debt. The debtor’s Utah bankruptcy attorney can assist the debtor is making a wise decision as to whether or not to surrender property in conjunction with the Chapter 13 plan.
Treating secured debts properly can be complicated and with the help of a Utah bankruptcy attorney debtors are generally able to address all of the debtor’s secured debts in the Chapter 13 plan.