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Chapter 13 Bankruptcy

  • September 26, 2020
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What is Chapter 13 Bankruptcy?

You have probably read elsewhere that a Chapter 13 Bankruptcy is a repayment plan. That’s true, but it is not the entire picture. Repayment does not mean paying all your creditors in full.  Depending on how debts are classified, some can be discharged while others are repaid.  For example, credit card debt could be mostly discharged in a chapter 13 bankruptcy, whereas your mortgage payments cannot. Well, like most things in law, there is an exception to not discharging mortgages. Under certain circumstances, second mortgages (Home-equity lines of credit) with balances that fully exceed the unencumbered equity in the property can be discharged in a Chapter 13 case. If you have a second mortgage on your residence, give us a call to find out more about stripping second mortgages.

A Chapter 13 plan is a comprehensive document that treats all your debt.  It spells out the amount of tax debt that can be discharged, and the amount that is to be repaid.  It discloses what you are keeping and what you are surrendering.  For example, you are keeping a truck you are paying on, but you are surrendering a car that needs significant repairs. It also addresses your leases and debts that you have cosigned.

 

What qualifies you for Chapter 13 Bankruptcy

Qualifications

Chapter 13 Bankruptcy is reserved for natural persons, and not corporations or LLCs. Fortunately, this does not mean that if you own a business, a corporation, or an LLC, you cannot benefit from a Chapter 13. If you file for bankruptcy as a business owner, the business-owned entities are treated as assets. In a sense, the business entities become part of the personal bankruptcy case.

Chapter 13 bankruptcy is a powerful tool to help small business owners who tend to guarantee their loans personally. As you can probably imagine, this is a complicated topic. If you are a business owner facing financial difficulty, you should consult with an attorney specializing in this area of law. You can also read my article on business bankruptcies.

Debt Limits

There are also debt limits for Chapter 13 Bankruptcy. These amounts are $419,275 in unsecured debt and $1,257,850 in secured debt (2020). These Chapter 13 debt limits are changed every year by Congress. If you owe more than these debt limits, then you still can restructure your debt through a Chapter 11 Bankruptcy.

How many times can file a Chapter 13 Bankruptcy?

In theory, there are no limits to the number of Chapter 13 bankruptcies you can file. In reality, you have to act in good faith when filing for any bankruptcy. Good faith has a broad and abstract meaning, but essentially, you can’t be abusive of the system.

Benefits of Bankruptcy Chapter 13

Chapter 13 bankruptcy restructures your finances.
Here is a list of some of the outcomes you can achieve in a Chapter 13 case:

Discharge unsecured debt.

It is possible to wipe out most if not all of your unsecured debt in a Chapter 13 bankruptcy. Many factors go into determining how much debt you can wipe out in Chapter 13, but generally speaking, it’s possible to wipe out unsecured debt.

Lower your auto loan interest rate.

If you have a low-interest car note, then you may not be able to have it lowered. However, if your car loan is in the double digits, it can generally be lowered.

Lower the balanced owed on a vehicle.

If you owe more than your car is worth, it’s possible to lower the balance you owe down to your vehicle’s value. It is called a cram down, and it’s possible to do if you have owned your car for more than two and a half years.

Get mortgage modifications.

Mortgage modifications can’t be accomplished in a Chapter 13 bankruptcy in all jurisdictions, but the Bankruptcy Court here in Austin recently created a loan modification program for Chapter 13 filers. The mortgage companies are not obligated to grant modifications. However, it’s still nice to have a dedicated portal to communicate with them and have the resulting modifications approved by a Federal Judge.

Resolve your tax debt problems.

Chapter 13 is not a magic wand, but it can wipe out some back taxes that are classified as general unsecured debt. It also creates a payment plan for the back taxes that you must pay. Often tax debt that is paid through a Chapter 13 case does not accrue penalties or interest.

Bring current your Mortgage payments

If you are behind on your mortgage payments, you can pay the arrears through a Chapter 13 case while your home remains protected from foreclosure so long as your case is active and the bankruptcy code’s automatic stay continues protecting your property.

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