Chapter 13 bankruptcy is a payment plan that lasts 3-5 years. The length of the payment plan can be discouraging for some people and Chapter 7 bankruptcy may seem initially more preferable. However, Chapter 13 has many advantages, including some that are not available in a Chapter 7, and it may be the best solution for your long term financial health.
Some of the advantages of a Chapter 13 bankruptcy include:
- allowing you to pay what you can afford,
- discharging debts you do not pay in full,
- saving your home from foreclosure, and
- removing a 2nd or higher mortgage.
The “Pay What You Can Afford” Solution to Your Debt
Chapter 13 allows you to make one monthly payment to a bankruptcy trustee that covers all of your debts. Your payment is determined by your budget, which you put together with your bankruptcy attorney for approval by the Bankruptcy Court. Your budget allows you to pay what you can afford.
Your budget is a combination of your actual monthly expenses, IRS standards, and standards of the Chapter 13 Trustee. Your income minus the above combination of expenses results in the amount you pay to a bankruptcy trustee every month. The amount you pay to the trustee is also called your discretionary income.
Even if you currently do not have discretionary income above what you pay in expenses due to job loss, expensive monthly vehicle payments, or other factors, your Chapter 13 bankruptcy attorney can often help you create a plan that reorganizes expensive loan payments or defers payments until you have enough income.
Chapter 13 Bankruptcy Discharges Debt
Since you are paying what you can afford, you may not be able to pay 100% of your debt over 3-5 years. In the majority of Chapter 13 bankruptcy cases people do not pay back 100%. In fact, people often only payback a small fraction of what is initially owed.
The amount of debt you do not pay back over the course of your Chapter 13 Plan is handled the same way it would be in a Chapter 7 – your dischargeable debts are wiped-out, so you receive a fresh start!
What happens if you can afford to payback 100% of your debt over 3-5 years? What is the advantage of Chapter 13 then? Chapter 13 bankruptcy provides people with the most powerful debt repayment plan available.
Your Chapter 13 bankruptcy will keep any further interest from accruing on dischargeable debt. You just have to pay off the balance owed on the day you file bankruptcy. For example, if you are paying 18% compound interest on $30,000 of credit card debt, then a Chapter 13 bankruptcy could save you approximately $19,000 in interest over 5 years. The bottom line is that you can be completely out of debt in 3-5 years, which may be impossible without bankruptcy.
Save Your Home With Chapter 13 Bankruptcy
In Chapter 13 Bankruptcy you can take past due payment on your mortgage and pay them back over 3-5 years in your repayment plan. In bankruptcy, past due payment on your mortgage are called “arrearages.” As long as you file your Chapter 13 bankruptcy prior to the foreclosure sale date, then you can take advantage of this Chapter 13 benefit.
There is one important caveat to keeping your home using Chapter 13 bankruptcy. It is that you must be able to make the regular monthly mortgage payments when it is next regularly due after your case is filed. As long as you can make the regular monthly payments, then having 3-5 years to payback the arrearages can help you save your home from foreclosure.
Remove 2nd or Higher Mortgages
What if you can only afford to pay your first mortgage after your case is filed? We may have a solution for you that will allow you to keep your house called lien stripping. Lien stripping allows you to remove 2nd or higher mortgages, so you only have your first mortgage.
In order to qualify for stripping a lien off of your home, the value of your home must be equal to or less than the amount owed on your first mortgage on the day your bankruptcy case is filed. The careful calculation of the value of your home before your case is filed should be done by an attorney experienced in the nuances of making these calculations to make sure your lien strip has the best chance of being approved.
If your lien strip is approved by the court, then your 2nd or higher mortgage will not need to be paid during the 3-5 years you are in the plan. At the end of your bankruptcy the mortgage liens will be stripped off your property and included in your discharge.
Find Out How Chapter 13 Bankruptcy May Help Your Financial Situation
There are many more benefits of Chapter 13 bankruptcy that may be available in your specific situation. If you think Chapter 13 bankruptcy may be an option, then speaking to the bankruptcy attorneys at Cohen & Cohen as soon as possible will help to get you on track to filing Chapter 13 bankruptcy and getting the full benefits and advantages from filing.
Call 303-933-4529 right now to schedule your initial consultation at our convenient central Denver location.
