Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a reorganization plan for individuals or small business owners(not corporation or partnerships) who would like to repay creditors but are in financial difficulty. For individuals who are home owners it's a great opportunity to be able to keep your home and pay off your arrearages(past due mortgage payments) or car payments over a chapter 13 plan which is typically 36 -60 months depending on whether you are below or above the median income for your household size in comparison to your household size in the state you live in. Typically you will pay something back to unsecured creditors but there are things known as 0% plans where you only pay back secured creditors and unsecured creditors don't get anything. The way we determine payments are based on your disposable monthly income that you can save at the end of the month. We look at your income and your expenses. You can pay however much necessary for your mortgage, financed cars etc. There are limits on spending based on IRS standards such as for food, gas, rent, and other expenses so it is a budgeting task. You have to have enough disposable income to pay something back otherwise you cannot be in a 13. You can keep all your possessions in a 13 even if they are not exempt, however, you cannot put your creditors in a worse position then if you had filed a chapter 7. This essentially means that you have to pay an amount through the plan that creditors would have been able to get paid had you done a liquidation in a chapter 7. In California, this is not as big of a problem as the exemptions are very good. However, lets say you have a boat and a boat is not exemptable since you already used your wildcard for a 22,000 dollar watch that you wanted to keep. If in a chapter 7 the trustee had sold your boat for 15,000 dollars to pay creditors then your chapter 13 payments would have to be at least $250 a month so as to pay back creditors the 15k they would have gotten in a 7 had you liquidated your boat.
BENEFITS OF A CHAPTER 13
Taking care of a 2nd lien in a chapter 13
If you have a 2nd lien that is completely unsecured at the time of filing, you can strip a lien in a 13. That means if your 2nd mortgage is totally underwater because your house is worth less then your first mortgage then at the end of the chapter 13 plan the 2nd lien is treated like an unsecured creditor and will be discharged. That can be a huge advantage for people that owe a lot on a 2nd mortgage and may be enough incentive in this housing market to put someone in bankruptcy who can still pay their bills and never would have thought about filing.
Paying back your arrearages
If you are six months behind on your mortgage and you want to keep your home a chapter 13 is probably the better way to go if you are facing foreclosure. You can keep your home in a Chapter 7 but only if you are current or can be current within a month or so. In a 13 we can put your arrearages into the plan and you can pay them back over 3-5 years.
Who can file a Chapter 13 bankruptcy.
To qualify you have to be an individual with regular income who owes less than $336,900 in unsecured debt, that includes student loans, credit card debt , medical debt and less than $1,010,560 in secured debts.
To be get a chapter 13 plan approved you must have income that is somewhat steady. You at least need to be able to average your monthly income if you are self employed or if you get quarterly commission checks. So once you figure out what your disposable monthly income is then that is what you will essentially pay in a chapter 13 plan albeit if your expenses are reasonable. Once you are done with your plan then all your unsecured debts are discharged. You have to have paid all your secured debts during the plan and be caught up with arrearages etc.
CHAPTER 13 LIEN STRIPPING
Stripping a junior lien in bankruptcy is one of the most powerful tools that Bankruptcy and Chapter 13 can offer a debtor in our current real estate climate. This was an unused tool for many years when everyone believed that the housing market would only continue to escalate in prices. Now that over 25% of houses are underwater(the mortgage that is owed is worth more than the house is worth), it can be a valueable tool in a chapter 13 bankruptcy.
What a lien strip does is to take a junior lien which is completely unsecured due to the fact that a real estate appraisal at the time of filing will show that the first mortgage would get all the money owed if it was foreclosed, and it allows the junior lien to be discharged at the end of the bankruptcy. This can be a drastic incentive for people who want to keep their homes but wonder why they would continue to pay on an investment that is so upside down. Think about that. At the end of your bankruptcy you will most likely have quite a bit of equity in your home rather than being upside down like most people will be in 5 years due to our current real estate environment.
Foreclosure proceedings will stop the minute that you file for bankruptcy. This will allow us time to come up with a repayment plan of your arrearages and thus allow you to pay off your arrearages within 3-5 years and pay pennies on the dollar for your unsecured creditors. If your 2nd or 3rd mortgage is wholly unsecured at the time of filing you could really be in a great situation once you come out of bankruptcy. You’ll have no debt, you’ll have equity in your house most likely. It truly will be a fresh start and with equity in your home and potential to refinance you won’t have to worry about living with less credit than you are used to.
Being able to strip a lien through the bankruptcy court is a much better idea than falling behind on your loan to potentially get a loan modification from a bank. I’ve seen people who have benefited from a chapter 13 lien strip and bankruptcy who had no credit card debt but were just in trouble with real estate investments and had lots of houses that were upside down. Talking with a Riverside county bankruptcy attorney about your choices in this housing market is a good idea for lots of people who would have never considered filing for bankruptcy. Keep the most valuable asset that you have and make it an asset instead of a liability through a lien strip.