Is your home in foreclosure? Has the bank turned you down for a loan modification despite repeated efforts on your part? If so, a chapter 13 bankruptcy may be the solution you are looking for. A chapter 13 bankruptcy filing can help you stop a foreclosure, and if the circumstances are right, you may be able to save your home. Keep in mind however, that in order to stop the bank from foreclosing on your home, the bankruptcy filing must be filed prior to the foreclosure sale date -also known as the trustee sale date. Once the foreclosure has actually occurred it usually takes a miracle to reverse it.
In addition to stopping a pending foreclosure, a chapter 13 bankruptcy filing will allow you to catch up on your mortgage arrearage over a prolonged period of time, typically three or five years. The problem is that once you are more than 3 months behind on your mortgage payments the bank will expect you to pay them the entire amount owed at once in order to reinstate your mortgage. They will not put you on a payment plan and allow you to get caught up over time. The chapter 13 bankruptcy solves that problem. It buys you time and forces the bank to allow you to pay back the mortgage arrears over time, instead of in a lump sum. The $12,000 in mortgage arrears for instance can be paid at a rate of $200 per month over the course of sixty months, instead of writing a check for the full amount.
What else can a chapter 13 bankruptcy do for you? How about a concept known as lien stripping. Can you show that what you currently owe on your first mortgage is more than what your home is worth? In that case, you just may be able to get rid of your second mortgage/home equity line. You may be able to eliminate your $50,000 second mortgage for example. The bank holding your second mortgage typically gets paid pennies on the dollar, and you only remain responsible for your first mortgage. That is a pretty remarkable tool.
As for your unsecured debt, your credit cards, medical bills, etc., for most consumers the chapter 13 bankruptcy filing will allow them to pay a far smaller monthly amount over the life of the chapter 13 plan. And once you have completed your three or five years of payments, any remaining balance on the unsecured debt is discharged. As in eliminated. Again, you typically pay pennies on the dollar.
Chapter 13 bankruptcy however is not without its limitations. In fact, one of the prerequisites for your chapter 13 bankruptcy plan getting confirmed is the feasibility test. Simply put, you must prove to the court that you have enough steady income at the time of your bankruptcy filing to continue to make your normal monthly mortgage payments, catch up on your mortgage arrears, and make some partial payments to your unsecured creditors. The bankruptcy court will work with you, but if it is obvious that you do not have the income then your case will be dismissed.
In addition, despite some effort in Congress a few years ago, a chapter 13 bankruptcy cannot at this time reduce the amount owed on the first mortgage of your principal residence through a process knows as “cram down.” And that is why I said in my opening paragraph that a chapter 13 bankruptcy filing may be able to save your home. Some consumers simply cannot afford their mortgage and can only save their home if the bank is willing to grant them a loan modification that lowers their monthly payments. Thus, do not let anyone tell you, not even a bankruptcy attorney, that a chapter 13 bankruptcy is a guaranteed way of saving your home.
Other than stopping a foreclosure, a chapter 13 bankruptcy can be a powerful tool for those saddled with a great deal of tax debt, for consumers burdened by a tremendous amount of student loans, for retrieving a car that has been repossessed, and for “cramming down” a car loan if your car is heavily “upside down.”
Finally, for those individuals who cannot “pass” the Means Test and qualify for a chapter 7 bankruptcy, you may be “forced” into a chapter 13 bankruptcy. The bankruptcy court will expect you to contribute all of your disposable income as determined by the Means Test for a period of three or five years. If you make all your monthly payments in a timely fashion your reward is a chapter 13 bankruptcy discharge. Meaning the amount of money that you still owe to your unsecured creditors after you have completed the chapter 13 plan is forgiven. For most folks this means monthly payments that are generally much smaller than what they would be paying outside of bankruptcy.
Please note that this is just a broad overview of how a chapter 13 bankruptcy works.
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