A lot of persons who come into my office feel overwhelmed by their debt
and cannot imagine trying to do the type of bankruptcy, known as Chapter
13, where they have to make a monthly payment to their creditors. The
question that always comes up is, why would I want to file for Chapter
13 over Chapter 7?
Strip That Second Mortgage
Believe it or not, there are often many benefits to filing for Chapter
13 bankruptcy over Chapter 7. The most common reason these days is that
you can strip your second mortgage in a Chapter 13 case whereas you cannot
presently do so in a Chapter 7 case. When bankruptcy attorneys talk about
"stripping", we are referring to a process where you prove that
your second mortgage or line of credit is completely unsecured and as
a result the court grants your request to remove that mortgage lien from
your property upon successful completion of all of your Chapter 13 payments.
Unfortunately, this process cannot also be used to strip a part of your
Pay Back Taxes Interest Free
But, did you know you can also use the Chapter 13 payment plan to pay off
certain debts in full, such as income taxes, interest free? For those
individuals that are currently on IRS installment plans and where a substantial
part of your payment may be going to interest and penalties, this could
make a big difference and also cost you a lot less money overall.
When you file Chapter 13 bankruptcy, the taxes you owe are determined as
of your filing date and do not continue to grow (assuming they are not
secured by property). So, if you owe $2,000 including interest as of your
filing date, this is what you pay back at 0% interest. Furthermore, only
taxes that are considered "priority debts" have to be paid back
in full. For these priority debts, in addition to the great interest rate,
penalties do not have to be paid back in full (they become unsecured debts
like credit cards) and no further interest or penalties accrue on the
So, if you are making a payment anyway to the IRS or state taxing authority
each month, consider how much further that payment could go in your Chapter
13 payment plan. If you aren't dealing with income tax problems because
you don't know how to, then consider utilizing the Chapter 13 process
before this debt grows more than it has to be or a tax lien or warrant
is field against you. You may also find out from speaking with a qualified
bankruptcy attorney, that some of your income tax debts are dischargeable
and can be paid back for less than 100% in a Chapter 13 case.
Get Back on Track With Your Mortgage and Avoid Foreclosure
Chapter 13 also provides individuals with a way to reinstate their mortgage
loan and get back on track with their normal payments. For a lot of homeowners
who have fallen behind on their mortgage payments, they may be facing
what is known as an "acceleration" of their loan, where the
bank demands all of the loan be paid to avoid a foreclosure. This is basically
impossible for most persons facing this problem. But, what if you could
take that amount you are behind on and pay it off over 60 months and resume
making your normal payments at the same time? This is possible in a Chapter
13 bankruptcy. So, if you owe $20,000 to your mortgage company and cant
come up with the whole amount now, think about whether you could come
up with $333.33 each month to deal with this. It may be better to pay
your mortgage company back that money each month than continuing to make
that car payment or credit card minimum payments each month.
What Happens to My Other Debt Payments When I File Chapter 13?
The general rule of thumb is, if you want to keep it, you're going
to have to keep on paying for it. So, car payments, HOA dues or maintenance,
mortgage payments, utility bills, and every day living expenses are things
you are going to have pay for each month. You also must keep on top of
any child support or domestic support payments you have been court ordered to pay.
What you're not going to be paying for each month is credit card minimum
payments, income tax installment plans, personal line of credit payments
and a second mortgage payment (if your attorney determines you can strip
this mortgage). All of the "disposable income" you used to commit
each month to these bills is now going to be going to the Chapter 13 plan
and will be broken down and distributed to the right creditors by the Trustee.
Overall, a Chapter 13 bankruptcy can be a great way to organize your debt
and take control over your life. While it is true that you are repaying
your debts, some of these debts are debts that you actually want to repay
anyway but couldn't figure out how to do so before. Don't brush
aside Chapter 13 just because it means you have to come up with money
each month. It may be the best money you ever spent!
Questions or interested in a consultation about your case? Email me at
firstname.lastname@example.org or call me at (914) 517-7565.