Understanding Chapter 13 Bankruptcy - Save Your Home From Foreclosure
Unforeseen circumstances such as loss of employment, reduction of income, accidents, medical issues, or unexpected expenses can wreak havoc on even the most carefully prepared household budgets. As a result, debtors may default on their obligations such as mortgage, credit card, personal loan or car payments. If the situation is not resolved quickly, negative consequences such as lawsuits, foreclosure, wage garnishments, and frozen/restrained bank accounts may follow. It may seem impossible to get back on track financially. Truth be told, sometimes a person really does need a second chance to take control of his or her financial situation. Chapter 13 can provide this opportunity.
Who Files Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is commonly pursued when homeowners are behind on their mortgage and they want to retain their home. Many of these debtors are already even in foreclosure. A Chapter 13 filing can stop a foreclosure lawsuit (including a scheduled sale date) and enable debtors to repay their past due mortgage payments over a three to five-year payment plan that is interest-free. Lenders cannot turn down the Chapter 13 payments, rather they must accept the monies toward repayment of the amounts owed on the mortgage. Additionally, the Bankruptcy Court usually offers a loss mitigation program to encourage home retention that enables homeowners to apply for and potentially obtain a loan modification. A successful loan modification in the Bankruptcy Court’s loss mitigation program is often a homeowner’s best chance to retain their property when the debtor is unable to afford a Chapter 13 payment plan with a high loan reinstatement balance.
Chapter 13 is not just for homeowners and past due mortgage situations only. Some Chapter 13 debtors are those who are unable to file a Chapter 7 bankruptcy because they are considered to have too much income to qualify for Chapter 7, or they have assets that are non-exempt and wish to retain those assets. For those debtors who do not qualify for a Chapter 7 bankruptcy or those debtors with assets they want to prevent from liquidation, filing for Chapter 13 bankruptcy may be the best solution to their debt problems.
The Chapter 13 Payment Plan
Upon filing a Chapter 13 bankruptcy petition, all debt collection is prohibited by the automatic stay provided under the Bankruptcy Code which includes demanding payment by phone or mail, and the continuation of lawsuits, garnishments and frozen accounts. The debtor submits a proposed debt repayment plan which must be then approved by the Bankruptcy Court. In their plan, a debtor does not necessarily have to repay all of their unsecured debt in their repayment plan. The percentage paid can be a very small percent all the way up to 100% depending on the facts of the case. The factors that affect the percentage paid by the debtor include the total amount owed, the debtor’s income, expenses, assets and the types of debts involved.
Once approved, the debtor’s Chapter 13 plan is paid over a three to five-year period (typically five years) and is interest-free on most debts. Through the plan a debtor’s various outstanding debts are consolidated together into one monthly payment to a bankruptcy trustee. Furthermore, if the debtor is paying one hundred percent of his or her debt in the plan, they often pay back less than what is owed, because only claims that are filed in a timely manner are paid in a confirmed Chapter 13 plan. If the debtor completes the plan, the debts without timely filed claims are discharged, as is any unpaid debt in a plan paying less than one hundred percent of the unsecured debt. This discharge of debts is similar to the discharge in a Chapter 7 case and creditors are prohibited from seeking to recover the unpaid amounts.
Chapter 13 Bankruptcy vs. Debt Settlement
In a debt settlement program, debtors are told to stop paying their creditors. Typically, stopping payment on an account will result in debt collection and eventually legal action against the creditors in an attempt to recover the debt. If a creditor obtains a judgement, they can pursue wage garnishment, restrain bank accounts and attach judgment liens to real estate owned by the debtor. Creditors do not have to negotiate with debt settlement companies and many of them refuse to do so. Debt settlement programs are also very expensive. They often charge fees up to 25% of the total debt balances which significantly reduces any proposed savings. Furthermore, any reduction in a balance owed in a debt settlement program over $600 is considered to be income by the IRS. The creditor who forgives a debt over $600 will issue a 1099-C. This can result in a sizeable tax bill. Unlike risky debt settlement programs, Chapter 13 Bankruptcy protects debtors from legal action by their creditors who are legally compelled to accept the terms of debtors’ plans, even if there is just a small percentage of debt being paid back. Plus, the debt discharged in a Chapter 13 bankruptcy is not considered taxable income, and therefore carries no negative tax consequences.
The Possibility of Stripping a Second Mortgage in Chapter 13
If the debtor owns a home that has no equity, and the balance on their first mortgage exceeds the current fair market value of the home), the debtor may have the ability to remove a second mortgage as a lien in Chapter 13 bankruptcy proceeding. This is called a “lien strip” as the loan is treated as unsecured debt. Removing a second mortgage can typically be done by filing a motion in the bankruptcy court. If the homeowner is successful with the proceeding, the court will order the second mortgage lien released from the property.
Contact The Law Offices Of David I. Pankin, P.C. Today
A Chapter 13 bankruptcy filing is very complicated legal procedure. In order to maximize the chances for a successful outcome, it is highly recommended that a debtor retain an experienced Chapter 13 bankruptcy lawyer to assist with preparing a bankruptcy petition and drafting a repayment plan. The Law Office of David I. Pankin has been practicing Chapter 13 bankruptcy for over 20 years and is ready to answer any questions you might have regarding Chapter 13 bankruptcy. To arrange a free consultation with a New York Chapter 13 bankruptcy attorney, please contact the Law Offices of David I. Pankin, P.C. by phone at 888-529-9600 or by using our easy online contact form. We have 3 convenient locations in Midtown Manhattan, Downtown Brooklyn and Long Island. We have helped clients from all five boroughs, Westchester, as well as Nassau and Suffolk counties.
Remember, “bankruptcy is not the end it’s a new beginning.”
Se Habla Español