When someone in Kentucky files for Chapter 13 bankruptcy, creditors will be deemed to be either holders of secured or unsecured debts. The interest rate of payment plan for secured debts, such as a mortgage on a debtor's primary residence, generally cannot be modified by a bankruptcy proceeding. The law treats unsecured debts differently. A bankruptcy court might lump together the outstanding loans that have no collateral and create a bankruptcy payment plan that only addresses a portion of the balance.

Debtors often try to have as many debts as possible classified as unsecured because they might reduce the amount owed. A recent case that was decided by a federal appeals court addressed this issue when a debtor claimed that the mortgage on a principal residence was also secured by the funds in an escrow account for taxes and insurance. The deed of trust assigned proceeds from any insurance claim to the lender. When a secured property has more than one form of collateral, the rules against modifying the loan might not apply.

The federal appeals court, however, upheld the lower court's ruling in favor of the lender. The court decided that the escrow funds and any potential insurance proceeds did not represent additional forms of security. They acted as safeguards upon the real property that served alone as collateral.

When a person wants to investigate the potential of bankruptcy for gaining a financial fresh start, legal advice could allow the person to make effective choices. An attorney might study the person's income and debts and explain whether Chapter 7 or Chapter 13 bankruptcy might provide protection. To prepare the court filings, an attorney could organize the person's financial records. Negotiations with creditors and the bankruptcy trustee might also be managed by the attorney.