For those with serious financial problems, a chapter 13 bankruptcy may be the best solution. Chapter 13 bankruptcy benefits are relatively unknown and are often misunderstood.
Some of these potential benefits are listed here with short explanations. If you live in Arizona, have serious debt problems, and have a steady income, you should speak to a bankruptcy attorney about any of the following that catch your eye.
1. Stop foreclosure and catch up mortgage arrears over time
Foreclosure rates in Arizona are climbing. Chapter 13 bankruptcy stops foreclosure and provides a mechanism for the filer to bring current any arrears over three to five years. The mortgage arrears are paid as part of a monthly payment to the chapter 13 trustee. As long as the chapter 13 plan proposed is viable and approved by the court, and the plan payments and normal house payments are made, nothing happens to the home.
2. “Strip down” mortgage
If the home’s value is less than or equal to what is owed on the first mortgage, chapter 13 can be used to change the second, third etc. mortgage(s) into unsecured debt which don’t necessarily have to be paid in full, thereby reducing the overall house payment. Legislation is being considered right now, that may allow certain filers to “strip” the home down to it’s actual value, cramming down both mortgages. Continue visiting this blog to stay updated on this issue.
3. Protect non exempt property
A Chapter 13 plan makes it possible for the filer to keep property which would be lost in a chapter 7. Much of which average consumers own, is protected by statute and doesn’t need to be protected in a chapter 13. You can review the current Arizona bankruptcy exemptions here.
For those items that aren’t protected, the filer must be able to pay the value of the asset during the plan length period in monthly installments, or the asset could be surrendered for distribution to creditors much like in a chapter 7.
4. Co-Debtor Protection
11 U.S.C. Section 1301, may stop a creditor from going after the co-debtor on a consumer debt, during the plan period.
5. Selling Property
If an asset is vulnerable from creditor attack, a chapter 13 bankruptcy filing will provide the asset owner some breathing room. It stops the creditor and under 11 U.S.C Section 1303 provides the filer the right to sell property under section 363 of the code. This allows for the control of the sale of the asset. This control may result in a better sale price.
6. Stop the Repossession of a Car and “Cram” it down
Filing bankruptcy stops the repossession of a car and may even allow the filer to re obtain a car already repossessed. If the car is one the potential chapter 13 filer wishes to keep and it is worth much less than what is owed, the car may be “crammed” down as well. This means that the filer may be able to pay only the lesser value of the car not the total amount owed through the chapter 13 plan. Any remaining debt would be treated as unsecured debt, partially paid through plan and/or wiped away at the end of the plan IF the car was purchased more than 2.5 years before filing.
As a side note, the filer is also able to “cram down”, non purchase money claims and purchase money claims that are older than 1 year. He or she can also potentially cram down a vehicle purchased for someone other then the filer as well.
7. Unsecured debt is frozen
Most chapter 13 plans propose to pay a percentage of what is owed to unsecured creditors. Not only do many of these plans “cram” down the amount paid in principal to unsecured creditors, they also stop the growth of interest and fees. Sometimes it is worth filing for that reason alone.
Some filers pay the chapter 13 trustee, attorney, secured debts for auto(s) they want to keep, arrears on home, priority child support arrears and priority taxes and discharge all else.
As an example, a recent chapter 13 client in our office was able to successfully propose to pay roughly $5000.00 of $150,000.00 in unsecured debt over the plan term, his car loan, trustee fees and most attorney fees and the remainder will be wiped away at the end of the plan.
I think that the fact that the filer is NOT necessarily paying back all of the unsecured non priority debt is one of the most misunderstood aspects of chapter 13 bankruptcy.
8. Chapter 13 is great for those with sincere desire to repay some of the debt
Many with debt problems cannot avoid bankruptcy despite the fact they don’t want to file. For those with a steady income, and a desire to try and pay back some of what they owe, a chapter 13 bankruptcy is often the answer. It allows the filer to try to pay at least some of the debt. For many, it is seen as the honorable thing to do. A number of our clients through the years, have insisted on using chapter 13, even if they otherwise qualified for a chapter 7 bankruptcy.
9. The Chapter 13 case allows for more control of consumer claims
The filer of the chapter 13 can control all consumer claims in the case. He or she will have standing to file what are called adversary proceedings on all pre petition consumer claims like violations of the fair debt collections practices act that occurred prior to the filing date. He or she can litigate any violations of the automatic stay or discharge violations by the creditors including the misapplication of payments and improper fees by mortgage servicers. Most adversary proceedings provide for fee shifting statutes that require the creditor to pay the filer’s legal fees when they lose.