Bankruptcy is a federal law that allows individuals to eliminate or reorganize debt through a Chapter 7 or Chapter 13 filing. Many consumers today are overwhelmed in debt and unable to make regular monthly payments toward these debts. Bankruptcy provides as opportunity for the consumers to “start fresh” with a “clean slate”. Bankruptcy help eliminates virtually all unsecured debts.
Chapter 7 Bankruptcy
A Chapter 7 case is not a repayment plan. In a chapter 7, the trustee collects and sells the debtors non-exempt assets to pay down the debtor’s debt. If the trustee determines that the chapter 7 case is a “no asset” case (no non-exempt assets exists) then the unsecure debts will be discharged. The Chapter 7 case will not eliminate any secure debt, i.e. debts generally liens associated with an asset (mortgage for a home or promissory note for a car); it will not eliminate any priority debts (IRS taxes, child support obligations, or student loans). The Chapter 7 case provides relief to the individual who has either has accumulated massive medical debts or has been unemployed for the a number of months and survived on credit. The chapter 7 provides the debtor an opportunity to eliminate the secured debt and start over fresh.
Chapter 13 Bankruptcy
The Chapter 13 case is offered referred as the repayment plan over a period of 36 to 60 months. This plan also discharges unsecured debts at the end of the plan. The greatest challenge is devising a monthly payment plan that is affordable and reasonable. Most debtors will file a Chapter 13 bankruptcy when they are behind on monthly mortgage payments and are in risk of losing their home. The Chapter 13 plan provide several opportunities in the saving the home. First, the chapter 13 allows the debtor to spread the mortgage arrears over a period of 36 to 60 months.
For example, if you are $15,000 behind in mortgage payments, the chapter will allow you spread the $15,000 over 60 months for a monthly payment of $250. Please note, you will still be required to make the current monthly mortgage payment in addition to $250.
Another, opportunity provided under the Chapter 13 case is the elimination of secondary liens. If your home has secondary liens, the value of the home is less than the accumulated liens, then you can strip the secondary lien –remove/discharge the secondary lien. For example, you have some valued at $200,000 and you have your primary mortgage lien of $200,000 and a secondary lien of $20,000. Since the total debt of the home does not support the value of the home, the lien of $20,000 will be strip.
Chapter 13 will also allow you to “cram-down” the debt and interest owed on a vehicle purchased at 910 days before the filing of the chapter 13 plan. Cram-down is similar to stripping a lien. For example, if you owe $17,000 on a vehicle valued at $9,000 – you can cram-down the value $9,000 and the remaining $8,000 will be discharged as an unsecured debt. Also, the financing interest can be reduce to the current prime interest rate.
Bankruptcy is highly subjective, and we recommend that you schedule an appointment to discuss all details to determine which bankruptcy, Chapter 7 or Chapter 13, will be best for you.