A Chapter 13 Bankruptcy is a court supervised reorganization of your debt with repayment terms to creditors that are often highly favorable to you. On a smaller scale, Chapter 13 allows you as an individual the ability to sort out and manage your debts in a manner similar to large corporations that have credit problems. Although Chapter 13 bankruptcy requires that you make monthly payments based on your disposable income, it has a number of added benefits not available in Chapter 7.
Unlike Chapter 7, Chapter 13 allows you the chance to bring delinquent home loan and automobile loan payments current while preventing foreclosure or repossession. In certain cases, you can even eliminate second and third mortgages on your home while reducing the payments and even the principal on your automobile loan. In essence you are allowed to give some of your secured creditors a “hair-cut.” At the same time many of your unsecured debts are reduced to “pennies on the dollar” or completely eliminated.
Chapter 13 is often a better option than Chapter 7 where you are trying to keep your home or car and you have fallen behind on the payments, or you want to alter unfavorable terms of a loan agreement. Some typical examples of Chapter 13 benefits:
Arrearages on Home Mortgages and Vehicle Loans. If you fall behind on a home mortgage or vehicle payments, you can stop the foreclosure and repay the arrearage in a bankruptcy plan over 3 to 5 years.
you can remove an junior lien (i.e. 2nd mortgage, HELOC etc), from your primary residence in a chapter 13 if the value of your home is less than the senior lien (i.e. 1st mortgage)
Example, Home A
1st Mortgage, $400,000
2nd Mortgage, $100,000
Home Value, $380,000
In a chapter 13, you can remove the 2nd mortgage on Home A
1st Mortgage $400,000
Home Value $420,000
You CANNOT strip the HELOC from Home B, nor can you reduce the principle amount of the HELOC.
What you need to do to strip a lien:
- Pay for a professional appraisal of your home from a certified appraiser.
- File your Chapter 13 bankruptcy and state in your chapter 13 that you are striping the lien.
- File a motion to remove the lien (attaching a copy of the appraisal).
Cram Down. A significant feature of Chapter 13 is “cram down.” For most secured debts (except home mortgages and vehicle loans less than 2 & 1/2 years old), you can repay the lesser of the value of the property or the payoff amount due on the loan. You can also drastically reduce the interest rate on the loan. For example, assume you have a vehicle loan more than 2 & 1/2 years old. The payoff amount due is $20,000. The contract interest rate is 18 percent. The market value of the vehicle is $10,000. You can propose a bankruptcy plan which pays $10,000 at 5.00 percent interest. The only issue subject to argument is the market value of the property. The creditor must transfer the title free and clear of the lien when all plan payments have been completed.
Selective Repayment of Secured Debt and Contracts. You can retain certain property and repay the debt in installments, and surrender other property without paying for it. For example, if you have a home mortgage and two car loans, you can keep the house and one car, and surrender the second car without payment. If you have several leases or contracts, you can reject some contracts or leases, surrender the property, pay nothing on the rejected contracts, and assume other contract or leases and maintain the contract payments.
Small Business Reorganization. You can also use Chapter 13 to reorganize a small business. All of the benefits available in a consumer filing are available to reorganize a small business. In business cases, a debtor can repay debts (or arrearages on loan payments) in installments over 3 to 5 years. A small business owner may also use the “cram down” provisions of the bankruptcy laws to reduce installment payments and the interest rate paid on secured debts. A small business owner can also use Chapter 13 to selectively reject unfavorable contracts or unexpired leases.
A significant limitation on small business cases is that the small business must be organized as a sole proprietorship. Only an individual may file bankruptcy under Chapter 13. Corporations, partnerships or other business entities are not allowed to file under Chapter 13, and can reorganize only by filing under Chapter 11. Chapter 11 cases are much more complicated than Chapter 13 cases. Even a simple Chapter 11 filing will usually cost a minimum of at least $15,000 to $50,000 in attorney fees.
Super Discharge. The rules concerning the discharge of debts in bankruptcy are much more liberal in Chapter 13 cases. A Chapter 13 discharge is commonly known as a “super discharge” because certain debts can be discharged in a Chapter 13 case that can not be discharged in Chapter 7. In Chapter 13 cases the following debts can be discharged: (1) malicious injury to another person or his property; (2) civil fines and penalties; (3) debts incurred in connection with a divorce decree. These debts can never be discharged in a Chapter 7 case.