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Understanding unsecured debts during Chapter 13

Debtors in Texas who are dealing with financial issues and are thinking about whether or not bankruptcy is the right option for them need to know about the different types of bankruptcies and what they require. For a person who is working or owns a business and would like to reduce debt but still pay back the majority of what they owe under different terms, filing for Chapter 13 might be their preferred choice.

There is often confusion as to the different types of debts that have accrued, how they are classified and whether or not they are required to be paid back during Chapter 13. One example is unsecured debts. Unsecured debts are debts that do not have collateral attached to them. With an unsecured debt, the Chapter 13 plan will deal with that last after priority claims and secured claims. The debtor is not required to pay the unsecured debts back in full provided that the person pay the projected disposable income during an applicable commitment period for the duration of the bankruptcy. Chapter 13 can be for three or five years.

The unsecured debtors must receive a minimum under the Chapter 13 plan of what they would get if the debtor's assets were subject to a liquidation through a Chapter 7 bankruptcy. With Chapter 13, the disposable income is what is reasonably required for the debtor to self-support and support dependents. Charitable contributions can be up to 15 percent of the gross income. If the debtor owns a business, then the disposable income will exclude what is necessary for its operation. When the applicable commitment period is determined, it will hinge on the income that the debtor receives every month. If it is less than the state median for a family of the debtor's size, it will be for three years. It will be five years if the amount is higher than the median.

There are benefits to Chapter 13 when a person is facing financial challenges. Having an understanding of the basic issues such as the difference between various debts and their categorization is one of the keys to making an informed decision as to which bankruptcy is preferable. Those who are thinking about Chapter 13 bankruptcy and are not fully conversant in how unsecured debts are defined should discuss the matter with a qualified legal professional to decide on which option is best.

Source: USCourts.gov, "Chapter 13 -- Bankruptcy Basics," accessed on June 21, 2016

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