Chapter 13 Bankruptcy - A Workout Plan for Non-Businesses
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Do you want to stop the banks from foreclosing on your home? Are you looking to get rid of a second or third mortgage?
A Chapter 13 bankruptcy proceeding lets working individuals consolidate and even lessen some of their debt burden provided they can faithfully observe a renegotiated payment schedule over a period of three or five years. Unlike Chapter 7, Chapter 13 does not require individuals to liquidate their assets to receive a discharge. Under Chapter 13, the bankruptcy court appoints a trustee who will assist in executing your debt repayment plan. The debtor makes payments to the trustee, who then disburses the funds to creditors in an order of priority regulated by statute.
On all unsecured debt such as credit card payments, the total amount you are obligated to pay will depend on your projected income over the next three or five years. Some of this income will be protected to cover basic living expenses. The rest of your income, the “disposable” income, will be submitted to the trustee for debt repayment. After the three or five-year interval, the court will discharge the remainder of the unpaid debt, even if individual creditors get back only a fraction of the principal on the original loan.
No one lives large under a Chapter 13 bankruptcy plan. But there are advantages to filing chapter 13. You will pay off most of your creditors within a few years (three or five, depending on your income), and for less money (sometimes far less) than you originally owed them. You might even be able to take care of some of your secured debt (i.e., money borrowed on collateral) within the same timeframe. Satisfaction of secured debt under chapter 13, however, demands that the creditor receive at least the value of the collateral over the term of the bankruptcy. More important, filing chapter 13 does halt foreclosure proceedings against your home, but if you fail to resume timely mortgage payments during bankruptcy, the lender still has the right act against your home.
An additional benefit of chapter 13 comes from the provision on “stripping liens” from your property. If your home value falls below the amount owed on your first mortgage, you can strip the second or third mortgage on the property, that is, you can convert these “junior” mortgages into unsecured debts under your bankruptcy plan. By reclassifying these mortgages into unsecured debt, you are effectively discharging them altogether. The “junior” mortgage lenders will be lumped together with the other unsecured creditors who, after receiving a portion of your disposable income, are considered “paid off” at the end of the three- or five-year term. This attractive feature of chapter 13 bankruptcy offers a singular advantage over chapter 7 liquidation, although a few states allow “lien stripping” under chapter 7 also.
You should check with your attorney to find out how your state’s laws affect bankruptcy planning, and to determine under which chapter it is best to file.
