Much of the appeal in filing for Chapter 13 bankruptcy over Chapter 7 comes from its ability to resolve secured loans. These loans leave the secured asset at risk of repossession or liquidation if the debtor defaults on the loan. However, a Chapter 13 case can both protect the asset and modify the loan to allow for easier repayment.
The most important element of a Chapter 13 filing is the repayment plan, which outlines the list of creditors in order of priority and the amount they will receive in payment over the duration of the plan. Secured loan lenders are of highest priority in a Chapter 13 case, taking over the bulk of payments in the plan. There are two things that influence how a secured loan is modified and how much the lender gets paid.
First, the value of the property is important because it determines whether or not the loan is considered underwater. If the debtor owes more on the loan than the asset is worth, it is considered upside down or underwater. The court may allow for the difference to be eliminated, leaving the debtor responsible for repayment only on the amount equal to the item value. The general rule holds that the debtor will be liable for the amount equal to the full value of the item, but not for any depreciation.
Second, the interest rate set by the court also determines how much the debtor will be required to repay. In some cases, the court may allow for the interest rate to be suspended or frozen, allowing the debtor to repay only the principal amount owed on the loan. There are also cases in which the court will either uphold the current interest rate on the loan, or inflate the rate if economic conditions warrant the increase in rate.