Chapter 13 bankruptcy cases require a serious commitment. While the Chapter 7 case is a relatively short (4-6 months) and straight forward process, a Chapter 13 cases commits the filer to a minimum of 36 months and possibly up to 60 months. Further, the Chapter 13 requires repayment of a small portion of the unsecured debt. Despite these perceived drawbacks, Chapter 13 of the bankruptcy code has powerful tools that get you back on track financially while allowing you to keep your property.
In meeting with people on a daily basis regarding financial problems, the number one issue facing most people is the fact that their house is upside down in value and the payments are way too high. Many people’s homes have dropped 50% in value over the last couple of years, leaving many to wonder if it is even worth staying in their homes.
A Chapter 13 bankruptcy can do two things for home owners in this current market: (1) get caught up on any missed payments. In fact you will be given 3-5 years to catch up on missed payments; (2) remove or “strip off” your second mortgage, Home Equity Line of Credit, or other junior lien on your home. For some, just having additional time to catch up on missed payments is all that is needed. The payments are spread out over the three to five year period and no interest accrues over the life of the Chapter 13 plan.
If your problem is that your house is upside down in value, then you may be able to remove and discharge your second mortgage or HELOC. In order to qualify, the value of your house must be less than what you owe on your first mortgage. For example, if you owe $200,000 on your first mortgage, and have a second mortgage of $50,000, but your house is only worth $150,000, then in a Chapter 13 we can remove the second mortgage completely, leaving only the first mortgage to pay. In determining the value of your home it may be necessary to get an appraisal. However, there are a couple of online websites that can give you an idea of what your home value is: www.zillow.com and www.cyberhomes.com .
A second powerful tool in a Chapter 13 case is the “cram-down.” The typical situation where we see the cram-down used is on vehicles that are upside down. If you have a car that you owe more than it is worth, then in a Chapter 13 case you “cram-down” the amount owed to the fair market value of the vehicle. For example, if you have a truck that is worth $10,000, but you still owe $15,000, in a Chapter 13 case we can implement the cram-down and you would only be required to pay the value of the vehicle, or $10,000.
The only requirement under the bankruptcy code is that you must have purchased the vehicle at least 910 days (2 1/2 years) prior to filing your bankruptcy case. Further, not only can we reduce the principal amount owed, but we can lower the interest rate to a more reasonable rate. Currently we can usually get rates of 5.25%.
While a Chapter 13 case requires more of commitment than the Chapter 7, there are many tools that we simply don’t have in a Chapter 7 case. If you would like to learn more about the Chapter 13 bankruptcy process, lien stripping, a cram-down, or any other bankruptcy related question, JacksonWhite offers a free consultation.