When a debtor falls behind with his payments to a creditor, the delinquent amount is known as arrears. As of May 2011, Chapter 13 bankruptcy allows debtors to create a payment plan to pay off the arrears within a three to five year period. Often, debtors file Chapter 13 bankruptcy if their property is at risk of being repossessed or if they want to stop creditor harassment while they attempt to reorganize their finances.
Definition of Arrears
In bankruptcy, the term arrears refers to the delinquent balance owed to a creditor. If a debtor has not paid his car loan for the past two months, the amount of money the debtor needs to pay to make the account current is referred to as the arrears. The amount of arrears a debtor owes to a creditor includes the principal payment and any interest, late fees or attorney fees that have accrued. When a creditor submits a claim to the bankruptcy court, it should provide a breakdown of the arrears as well as the total amount owed for the entire debt.
Arrears for Secured Creditors
Creditors with a lien on the debtor’s personal or real property are known as secured creditors. When a debtor falls behind with his payments to a secured creditor, it can be difficult to become current within a short period of time. The debtor has the option of filing for Chapter 13 bankruptcy if the creditor is not willing to negotiate an affordable repayment plan. In a Chapter 13 plan, the debtor has three to five years to pay off the delinquency and also needs to keep making regular payments as they become due. Prior to filing for bankruptcy, the debtor should consult with a bankruptcy attorney and assess his finances to make sure he can afford to keep the property and pay off the arrears.
Arrears for Unsecured Creditors
Unsecured creditors do not have a lien on the debtor’s property. Even though a debtor is not in danger of losing his property to an unsecured creditor, the Bankruptcy Code requires the debtor pay off arrears to certain types of unsecured creditors. For example, if the debtor is not current with his child support payments, he must include those arrears in the Chapter 13 plan. The bankruptcy court will not approve a payment plan if the debtor does not include priority unsecured debts such as child support. The debtor only has to include payment of non-priority unsecured debts such as credit cards and medical expenses if he has enough money to pay those creditors back. Otherwise, those debts will be discharged after the Chapter 13 bankruptcy case is completed.
Defaulting on Bankruptcy Payments
If the debtor has difficulty staying current with the Chapter 13 payment plan, it can jeopardize the status of the bankruptcy case. A creditor can request permission from the court to pursue collection of the debt based on the rights available to them outside of bankruptcy. The bankruptcy trustee administering the case may also recommend the court dismiss the bankruptcy case if it appears the debtor cannot feasibly pay the debts. If the case is dismissed, creditors can collect payment for the arrears by repossessing the debtor’s property, implementing wage garnishments or placing liens on the debtor’s bank account.