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The Advantages of Filing for Chapter 13 Bankruptcy
Chapter 13 bankruptcy provides many benefits to people overwhelmed with debt, including the possibility of stripping second mortgages.
August 20, 2011 /Mens Interest PR News/ -- If your finances have become precarious, and debt collectors are filling your mailbox with collection notices and your phone is constantly ringing, you may want to consider filing for protection under the U.S. Bankruptcy Code. This article provides an overview of Chapter 13 bankruptcy and how it can help you.
Chapter 13 bankruptcy is known as wage earner or reorganization bankruptcy. Under this bankruptcy chapter, individuals with regular incomes create debt-repayment plans. Filing for Chapter 13 bankruptcy places an "automatic stay" that stops all debt-collection activity against the individual, including foreclosure proceedings. This stay protects debtors as long as they remain current with their repayment plans, meaning that creditors can no longer contact them. Just as important, Chapter 13 stops interest and penalties from accumulating on unsecured debts, including debts owed to the IRS.
Filing for Chapter 13 bankruptcy allows many people to remain in their homes, as long as they continue to make the mortgage payments on time. Chapter 13 also is valuable for homeowners because they can roll any delinquent mortgage payments (arrears) into the plan and repay them over the life of the debt-repayment plan.
The Chapter 13 Debt-Repayment Plan
The centerpiece of Chapter 13 bankruptcy is the debt-repayment plan. The repayment plan is essentially a budget used to repay debts before emerging from bankruptcy by consolidating an individual's debts into affordable monthly payments.
The plan does not require repayment of unsecured debts in full as long as the individual pays his or her projected "disposable income" over an "applicable commitment period," and as long as unsecured creditors receive at least as much under the plan as they would receive if the individual's assets were liquidated in Chapter 7 bankruptcy. Secured debts such as a first mortgage or car loan must be repaid in full under the Chapter 13 plan, although sometimes the interest rate on the car can be significantly reduced. An experienced bankruptcy lawyer can assist with this process.
Stripping Second Mortgage Liens in Chapter 13
A valuable feature of Chapter 13 bankruptcy is lien stripping. A Home Equity Line of Credit, also known as a HELOC, is a common form of a second mortgage that was taken out by many homeowners in the last decade when home values were soaring. If, as is common today, the home is no longer worth as much as it was when the second mortgage was added -- typically called being "underwater" -- Chapter 13 bankruptcy may allow the individual to "strip" the second mortgage.
If the individual can demonstrate that the home does not have enough equity to use as collateral for the second mortgage (i.e., the house is worth less than the first mortgage), the second mortgage can be placed in the Chapter 13 repayment plan as an unsecured loan, essentially treating the second mortgage like credit card and other unsecured debt, which may not be required to be paid in full before discharge in Chapter 13 bankruptcy.
It is possible that the second-mortgage holder will object to lien stripping, and the debtor may need to have the home's value determined in an appraisal. An experienced bankruptcy attorney can review the loan documents and help assess whether an appraisal is necessary. Because of a Supreme Court case decided in 1992, lien stripping is not available in a Chapter 7 bankruptcy proceeding.
The 341 Meeting of the Creditors
Between 20 and 50 days after the individual files the Chapter 13 bankruptcy petition, the assigned bankruptcy trustee will hold a meeting of creditors, often referred to as the 341 meeting. During this meeting, the trustee places the debtor under oath, and both the trustee and creditors may ask questions of the individual regarding his or her financial status and debt.
The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the repayment plan. While this meeting appears to be and can be intimidating, most of the time the creditors do not appear, and the trustee is unlikely to have many questions. A knowledgeable bankruptcy lawyer will help his or her client prepare for the meeting and address any concerns.
Confirmation of the Debt-Repayment Plan
After the 341 meeting, there is a scheduled hearing for the confirmation or rejection of the repayment plan. The bankruptcy court will review the plan before confirming or rejecting it, and creditors may object to the confirmation. Most plans are confirmed, assuming they do not have any glaring defects such as leaving out creditors or failing to account for all disposable income.
Once a Chapter 13 debt-repayment plan is confirmed by the bankruptcy court, the individual begins making payments to the bankruptcy trustee. Creditors will no longer be able to harass the individual, and the payments will be consolidated with the bankruptcy trustee, who will distribute payments to individual creditors.
If you need relief from overwhelming debt, contact a knowledgeable bankruptcy attorney to discuss whether bankruptcy is right for you.
Article provided by Law Offices of Robert L Firth
Visit us at www.firthlaw.com
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