Part of our job is to educate those clients that come to meet with us regarding myths surrounding bankruptcy. This seems to be the case particularly for Chapter 13 bankruptcy. What most clients do not realize is that Chapter 13 can be a very powerful tool in dealing with debt that is otherwise not dischargeable in Chapter 7.
Taxes
If you owe non-dischargeable tax debt, Chapter 13 can be a great option to have up to 5 years to repay the debt interest and penalty free. This allows you to repay the IRS on your terms - not theirs.
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Curing arrearages on mortgage and cars
Chapter 13 is a good option for those clients that are behind on their home or car payments. Chapter 13 will allow you to "catch-up" and make up those payments during your plan. If you financed your vehicle more than 910 days ago, we can also "cram down" your vehicle, meaning, you only have to pay back an amount equal to the current fair market value. Regardless of when you've purchased your vehicle, Chapter 13 will allow you to lower your interest rate on vehicles (generally between 5-6%).
Lien Strip
This is probably one of the most compelling reasons to file for Chapter 13. If the fair market value of your home is less than the value of your first mortgage, hence leaving your second mortgage wholly unsecured, Chapter 13 allows you to "strip" the second mortgage. After completion of your Chapter 13 plan, you can keep your property subject only to the first mortgage. For example, let's assume Bob has a home with a first mortgage of $400,000 and a second mortgage of $200,000. The current fair market value is $300,000. He can file for a Chapter 13 and strip the second mortgage. After 5 years, he will be left only with the first mortgage on his home.
One of the most common misconceptions about Chapter 13 is that the Debtor will be required to pay back all of his or her debt. Not true. Most often, the Debtor will end up paying as low as 0 - 5% of the unsecured debts (such as credit cards, medical debt, etc.) How much you will end up paying into the plan will depend on several factors including:
1) income,
2) expenses,
3) unexempt assets,
4) secured property, and
5) priority debt.
Disclaimer: The information contained in this newsletter is informational in nature and not legal advice. You should consult with a lawyer about your specific circumstances.
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