When you file a Chapter 13 bankruptcy, also known as a "wage-earner plan," you agree to turn your income over to the court for a specified period of time, sometimes up to five years, in return for the trustee negotiating and paying your creditors. In most cases, creditors will not receive the full amounts they are owed; however, most creditors will agree to a Chapter 13 Plan due to the fact that they will receive some money, rather than nothing at all. At the same time, it is in the creditors' best interest to try to negotiate the most lucrative settlement possible, and they have the right to petition the court for as much as they can collect.
When you file for bankruptcy, the first thing that will happen is that the court will schedule a 341 hearing, also known as a creditors' meeting. Notices will be sent to all your creditors, and they have the right to appear at the hearing and petition the court to include them in the plan and at the highest interest rate possible. Depending on the terms of your original contract with the creditor, the court may grant some or all of the creditors' requests.
Generally, when a person files a Chapter 13 bankruptcy plan, there are not enough funds to pay all the creditors their principal and interest. If there were, you would probably not be filing bankruptcy! Therefore, the court must make decisions based on the amount of funds available and the amounts owed to the creditors.
Bankruptcy court judges and trustees generally follow a pattern in determining the priorities of payments to the creditors. The first creditors to be protected are known as secured creditors. This means that you hold an asset which is secured by the debt owed to the creditor. Examples of secured creditors would be your mortgage company, your vehicle financing institution, and any creditors holding liens on real property. These creditors will generally receive the full amount of the principal owed to them, although they may not always receive all the interest to which their lien entitles them.
Next in line are the unsecured creditors. These would include your credit card companies, loan companies, and others who might have lent you money or credit on your signature. Generally, these creditors do not receive much, if any, of their debt, and if they do, they rarely receive interest on the debt. Because of this, unsecured creditors will usually try the hardest to collect their debts prior to the bankruptcy being filed. Once a bankruptcy is filed, an unsecured creditor often does not receive much.
All creditors have rights under the Bankruptcy Code and the state laws to attempt to collect their debts; however, they are not allowed to pursue legal remedies once a bankruptcy is filed. They are not allowed to contact you directly once a bankruptcy has been filed or to threaten you in any way regarding your debt.
Legal Helpers can find an attorney to help you file your Chapter 13 bankruptcy and protect you from creditors.
