A Chapter 13 bankruptcy plan is a way of forcing your creditors to alter their previous agreements. You do have to pay interest during a Chapter 13 case to certain types of creditors, and the interest you pay depends upon the type of debt you owe to that creditor.
General Unsecured Debts
General unsecured debts have the lowest priority in bankruptcy out of all the types of debts. Credit card debts, medical bills and personal loans are the most common types of general unsecured debts. General unsecured creditors receive only a percentage of what you owe, and they don't receive interest on their claims. They may end up receiving interest, however, if your plan pays them 100 percent and there is a surplus.
Priority Unsecured Debts
Priority unsecured debts are debts that are unsecured because they have no collateral, but which the Bankruptcy Code has given special priority. Child support, alimony and certain income taxes are priority debts. Generally, domestic support debts are paid outside the Chapter 13 plan, but if you owe income taxes to the IRS or to your state government, you must pay the balance in full, plus interest. You can propose any interest rate; however, the IRS must agree to the rate.
If you pay your mortgage through the Chapter 13 plan, your standard mortgage interest rate applies. The Bankruptcy Code prohibits you from changing your mortgage interest rate. You must also pay interest on any mortgage arrears you're paying through the plan. For example, if your mortgage payment is $1,200 per month and your original mortgage had a 7 percent interest rate, the plan will not change that. However, if you also have $3,700 in unpaid mortgage payments that you're trying to catch up in the plan, you must pay that amount in full with interest. You can propose an interest rate and find one with which the mortgage company agrees, typically between 6 percent and 8 percent.
You must pay car loans in full through the Chapter 13 plan, with interest. You can modify the interest rate so that it's lower than your original interest rate. A typical interest rate on a car loan in a Chapter 13 case is between 6 percent and 8 percent. The district in which you file your case will have its own customary percentages.
How to Pay Off a Chapter 13 Bankruptcy
Under a Chapter 13 bankruptcy repayment plan, you usually make payments by postal mail, electronically or via payroll deductions.
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