Giving Thanks for Chapter 13 “Adjustment of Debts”
Nov. 30, 2015
It’s way past Thanksgiving but Chapter 13 has many features that make you take notice and appreciate what they can accomplish.
During Thanksgiving week we told you about 10 features of Chapter 7 “straight bankruptcy.” It only seems fair to bring you the same for Chapter 13 “adjustment of debts.” These are mostly ones that are not at all available under Chapter 7. Here are the first 3 of these features, with more to come a couple days from now.
1) The Long “Automatic Stay”
The “automatic stay” stops against almost all collection actions against you and everything you own as of the moment your bankruptcy case is filed. The big difference under Chapter 13 is that this protection lasts so much longer than under Chapter 7. That’s because a Chapter 13 case lasts so much longer—3 to 5 years instead of only about 3 or 4 months—and this stopping and preventing of creditor actions can last throughout those years.
This extended protection can creates some significant advantages with certain kinds of debts when you need more time to deal with them.
For example, if you are behind on a home mortgage and had no way to bring it current within the time that the mortgage lender was demanding, filing a Chapter 13 case would give you 3 to 5 years to catch up on those back mortgage payments. During that time the lender could not foreclose on the home. As long as you made your regular and catch-up payments as required by your court-approved plan, you and your home would be protected from the creditor throughout this time.
So Chapter 13 not only relieves immediate collection pressures on you but keeps protecting you so that you have time to do what you need to do financially.
2) “Cramdown” of Vehicle Loans
“Cramdown” is an informal term for the procedure available only under Chapter 13 for legally re-writing a vehicle loan when your vehicle is worth less than you owe. As a result your monthly payment and the total amount paid for your vehicle are usually significantly reduced.
Your vehicle loan must have been made more than 910 days (slightly less than two and a half years) before your Chapter 13 case is filed to do a “cramdown.”
In a “cramdown” the balance owed on the vehicle loan is divided into two: the secured and unsecured parts. The secured part is the amount of the value of the vehicle. The unsecured part is the rest of the loan. It’s considered unsecured because it’s beyond what the is secured by the vehicle.
Only the secured part has to be paid in full during the life of the Chapter 13 case, often with a lower interest rate. If the value of the vehicle is much less than the loan balance, and the payments for it are stretched over a longer period, the resulting monthly payment is often much lower than what the regular payment was under the contract.
The remaining unsecured part is paid usually only to the extent that you have money available during the course of your Chapter 13 case to pay it. Often only a small portion of it is paid because your money goes instead first to the secured portion of the vehicle loan, and then to “priority debts” like recent taxes. Sometimes nothing has to be paid on the unsecured portion if there is no money left for it.
3) “Stripping” of Second (and Third) Mortgage
If you qualify to “strip” a mortgage from your home’s title, you do not need to pay that mortgage’s monthly payments, would likely pay only a fraction of that mortgage balance, and get much closer to building equity in your home. Under the right conditions, you can get rid of the debt you owe on a second or other junior mortgage, and get rid of the lien on your home’s title securing that debt. And if you were behind on those mortgage payments, you do not have to pay them either.
You can do this in a Chapter 13 case IF the value of the home is less than the amount owed on the your first mortgage plus any other liens that are ahead of the mortgage being stripped (such as for property taxes or a homeowners’ association).
Chapter 13 allows you to treat the debt being stripped of its mortgage like a “general unsecured” debt. Those are debts with no lien on anything you own, which are paid only as much as your budget enables you to pay during the life of your 3-to-5-year Chapter 13 case, which is often not very much. That’s because you are allowed, indeed required, to pay your secured debts and “priority” debts ahead of the “general unsecured” ones.
As a result the debt on your mortgage that’s being stripped is usually paid only pennies on the dollar, and sometimes nothing at all.
Then, once you get to the end of your Chapter 13 case by having paid whatever your court-approved payment plan required of you, your second (or third) mortgage lien is stripped off your title. That mortgage balance is then discharged—legally written off. Your home no longer has that mortgage on its title or any of that debt against its equity.