Chapter 13 Bankruptcy Can Offer Struggling Homeowners Much-Needed Relief

In July of 2011, foreclosure notices were filed on 56,193 residential properties in California. That meant one out of every 239 California households faced a foreclosure filing in July, the second-highest rate in the country. In the wake of the Great Recession, thousands of California families are finding themselves in precarious living arrangements, sometimes owing more than their home is worth on a second mortgage. To many consumers, bankruptcy may not intuitively sound like a productive avenue for saving a home. But, Chapter 13 bankruptcy can have many benefits; a Chapter 13 filing is one of the most effective ways to save a home from foreclosure, catch up on delinquent payments and strip off burdensome second mortgages.Chapter 13 Overview

When many consumers hear the word bankruptcy, they often worry that they will be forced to sell their personal property to partially repay creditors before debt is discharged. This is rarely the case. The truth about bankruptcy is that laws exist to protect your assets. These laws provide what is known as exemptions to protect your personal property.

In the event that a person pursuing a Chapter 7 bankruptcy has assets that cannot be protected, they can either pay the value of the non-exempt asset to the bankruptcy estate, surrender it or pursue a Chapter 13 bankruptcy, which will allow them to pay the value of the non-exempt asset over three to five years.

When a person files Chapter 13 bankruptcy, a plan is prepared based on what the person’s budget can afford and what needs to be paid. Certain debts, such as car payments, must be paid within the plan. There are several advantages this. Frequently the person will be able to keep their car for a lower payment, but if there are arrears owed, they can be paid within the Chapter 13 plan, stopping repossession of the car. Instead of making payments to the car company, payments are paid to a trustee appointed by the bankruptcy court to make dispersals.

After the bankruptcy court approves a Chapter 13 repayment plan, it is up to the individual to keep up with payments over the three to five year term. If the plan is completed successfully, most remaining debts (with the notable exception of long term obligations like a home mortgage or student loan debt) will be completely discharged.

Lien Stripping, And Other Ways Chapter 13 Bankruptcy Can Help Save Your Home

Providing homeowners with the opportunity to remain in their house is one of the most significant benefits of Chapter 13 bankruptcy. Filing a Chapter 13 case automatically halts foreclosure proceedings, and even allows homeowners to catch up on delinquent mortgage payments.

Individuals who wish to keep their home must make all mortgage payments that come due. Although Chapter 13 bankruptcy will offer protection, it will not change the terms of mortgage. The primary mortgage debt will still need to be paid, however the rescheduling of other types of debt means that more income should be freed up to meet a mortgage obligation.

The biggest benefit of Chapter 13 bankruptcy is for homeowners in California is the opportunity to eliminate second and third mortgages. This feature of Chapter 13 can mean the discharge of thousands of dollars in mortgage debt.

Here’s how it works. When you take out a home mortgage, the debt is secured by the valuable of your home. But, oftentimes second mortgages represent value over and above your home’s actual worth. In a Chapter 13 case, when the outstanding balance on a first mortgage is equal to or greater than a home’s value, a second mortgage can be stripped.

Take a simple example: your home is worth $150,000, and you have a first mortgage for $150,000. But, you also have a second mortgage (or any other type of lien against your home) for $50,000. Since lenders are secured only up to the value of your property, there is nothing securing the lien of the second lender. The $50,000 loan may be “stripped” from your home in Chapter 13 bankruptcy.

Stripped liens become part of your unsecured debt. This is significant because unsecured debt is treated differently in Chapter 13 bankruptcy; the lion’s share of money under a typical repayment plan is allotted toward secured debts. And, at the conclusion of your repayment plan term, the Chapter 13 discharge eliminates the remaining balances owed on unsecured debts. Typically, only a small fraction of a stripped second mortgage is paid during their repayment plan. Anything left over is discharged at the conclusion of the plan.

Find Out If Chapter 13 Is Right for You

Chapter 13 bankruptcy can be a powerful tool in the fight to keep your home. Lien stripping can mean thousands in savings, and the automatic stay in Chapter 13 stops foreclosure in its tracks.

Of course, Chapter 13 is not for everyone. Only an experienced bankruptcy attorney can help you determine if Chapter 13 is best for your individual circumstances. If you are struggling to make your mortgage payments, contact a bankruptcy attorney as soon as possible to explore your options.