Chapter 13 is a type of reorganization bankruptcy in which a debtor restructures his or her debts. It is a good option for individuals seeking to stop foreclosure on their home or real estate, and it also stops vehicle repossession. Bankruptcy Chapter 13 also allows individuals to consolidate all their debt, from credit cards to medical bills to delinquent income taxes and student loans.
The process involves the attorney and debtor developing “a plan” to show their creditors how they will repay their debts. Debtors are often given significant breaks or help in the repayment of their debt, and often, debts may be paid at pennies on the dollar. Interest rates on certain debts can be stopped altogether or often lowered depending on the type of debt you owe, the amount of property you own, and your income level.
Advantages of a Chapter 13 Consolidation
- Save your home – Stops foreclosure, and forces the mortgage company to start accepting your normal payments once again. (Programs for Court Supervised Loan Modification on your home mortgage are now available in bankruptcy!)
- Allows you time to cure the amounts you are behind on your home, request a loan modification or allow you to sell your property.
- In certain cases allows you to strip off 2nd/3rd mortgage liens.
- Stops vehicle repossession, and can significantly lower your car payments and interest rate.
- Stops garnishment of your wages.
- No liquidation of assets – debtors can keep even non-exempt property.
- Stops creditor harassment.
- Appears 3 years less on credit reports than chapter 7.
- Consolidates all debts into a single monthly payment.
- Majority of attorney fees can be wrapped into the chapter 13 plan.
- As long as you have not filed a prior chapter 7 in the 8 years prior to filing the chapter 13, you may be able to convert to chapter 7 if the reason you filed the 13 no longer persists.
Disadvantages of Bankruptcy Chapter 13
- Debtors are expected to live within their means while they are under a chapter 13 plan.
- Debtors can incur new debt while in the plan, only with court approval.
- It is still a form of bankruptcy and will have some negative impact on credit.
Hold off on taking out that second mortgage or wiping out your retirement savings – you may not have to.
Chapter 13 bankruptcy can often be a better option then cashing in your retirement savings (because these are exempt, totally protected, in most bankruptcy cases.) Chapter 13 is also better than taking out yet another loan with a consolidation company, or even worse a 2nd mortgage on your home.
Individuals finding themselves falling behind on their mortgage payments or credit cards often look to try to refinance these debts through yet another mortgage. The problem with taking out a 2nd mortgage or a mortgage refinance, outside of closing costs and interest, is that they typically eat up any equity you have built up in your home and create an even larger mortgage lien and another monthly payment. Refinancing starts your loan all over again. Don’t take out a second mortgage or refinance and put all your debt on your home. Otherwise, if you later default on these payments you will actually put your home at risk of foreclosure. Chapter 13 can save your home’s valuable equity.
Chapter 13 offers real debt relief, vs. out-of-state debt consolidation/settlement companies
Traps for the unwary.
Many people with credit card debt are lured to companies offering to settle with their creditors or consolidate your debts. I meet with people everyday that regret that decision. The main reason is that these companies cannot guarantee that the creditors will accept their offers, and sometimes the creditor sells your account to a 3rd party who decides to collect, and even sue you, even while you are in a “repayment plan”. In chapter 13, your creditors cannot opt out of the plan, once your plan is confirmed your creditors are stuck with the percentage you have proposed, and you are legally protected under the automatic stay. Debt settlement companies can cause just as much damage to your credit rating, as payments are often reflected late if at all.
Mortgage scams
If your mortgage company or a 3rd party is offering you a “way out” while they are threatening or pursuing foreclosure, be very careful. Once a mortgage company has decided to foreclose on your property, they are often not serious about helping you out. They are interested only in selling your home. If you find yourself always dealing with a different person, and the mortgage company is not keeping their promises to stop the foreclosure, you need to contact our office immediately.
Bankruptcy Chapter 13 Bottom Line
Do Not take out a second mortgage, refinance or modify your loan or consolidate with some out-of-state debt settlement company before you talk to us. You should consider all your options first. You will be glad you did.
Contact Dantzman & Dantzman if you are in debt and might benefit from Chapter 13 bankruptcy or other options our firm offers. Call us today at (845) 454-1400 .