Chapter 13 Bankruptcy


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Chapter 13 Bankruptcy

If an individual or business does not qualify for chapter 7 bankruptcy, that person or entity may file under chapter 13 bankruptcy. A Chapter 13 bankruptcy case is referred to as a reorganization bankruptcy, wherein a payment plan is created and you agree to repay your creditors a certain percentage of your debt. This type of bankruptcy and the repayment plan last approximately three to five years. The benefits of this type of bankruptcy is you can often structure a lower payment, lower interest rates on your mortgage and other loans and sometimes eliminate or reduce principle amounts owed. This type of bankruptcy appeals to individuals who want to keep their property such as their home or cars. Additionally, It is the only option for individuals who don’t qualify for chapter 7 bankruptcy because they may make too much income per the bankruptcy code or have conventional income wherein their income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

Repayment Plan

Under your Chapter 13 repayment plan, you must include a plan to pay certain debts in full, called “priority debts.” These debts are considered to be more important that other debts and have the first of receiving payments from the bankruptcy trustee. These debts include things like taxes and child support payments.

In addition, your repayment plan in a bankruptcy must also include payments for your car or home. More information about payments on defaulted debts are listed below. Lastly, the repayment plan must also show that if you have any disposable income after making payments on secured debts, that this money goes towards making payments on unsecured debts, if any. If you do not have any disposable income at the end of the day then it may not be required that you make payments, however, a good faith effort must be made to repay your unsecured debts.

Stop Foreclosure On Your Home

Bankruptcy is a powerful tool that will allow you to keep your home if you are in foreclosure status. Bankruptcy provides for an automatic stay against foreclosure which prevents lenders from foreclosing on your property and allowing you to pay your past dues within a 5 year timeframe. In fact, some individuals qualify to file a Chapter 13 bankruptcy with a zero percent plan that will allow you to possibly remove a second mortgage entirely.

Chapter 13 bankruptcy is much different than a chapter 7 as the bankruptcy court can generally impose a requirement on the mortgage company to let the debtor pay past due debts in any particular fashion. Therefore, if keeping your home is a priority, and you have a regular income, Chapter 13 bankruptcy may be the right option for you to keep your home without the risk of foreclosure.

Removing a Second Mortgage (aka “stripping”)

Lien stripping or cram down results in a secured claim being reduced to the value of the underlying collateral. In a Chapter 13 bankruptcy, liens can be stripped off the debtor’s assets when the lien exceeds the value of the property. Take for example a home currently valued at $500,000.00., with a first mortgage of $400,000.00, and a second mortgage of $300,000.00. The first mortgage is secured by $100,000.00 (value of the property minus the lien). The second mortgage is not secured because the property does not have sufficient equity. In this case, the second lender is lien striped and in a Chapter 13 bankruptcy, that lender is treated as an unsecured creditor.

Prevent Repossession of Your Car

In a Chapter 13 bankruptcy, if you are behind on automobile payments, you can often prevent repossession and keep the car by continuing to make regular payments through a repayment plan. In some instances interest rates may also be reduced but results vary case by case.