Chapter 13 is a type of bankruptcy in which a debt repayment plan is used to consolidate debts and make payments on your debt over a 3 to 5 year time frame. You file a plan with the Bankruptcy Court in which you make payments to a Chapter 13 Trustee, based upon your ability to pay. There is no requirement that unsecured creditors be paid anything in a Chapter 13. Unsecured debts usually stop accruing interest during the life of your plan. Chapter 13 is also called the "wage earner" bankruptcy and requires that you have a steady source of income, such as wages, self-employment income, unemployment income, or social security income, to be eligible.
My house is being foreclosed or my car is being repossessed. How can Chapter 13 help me?
Usually the filing of a Chapter 13 bankruptcy will immediately stay (stop) any foreclosure proceedings or repossession actions. Some exceptions to the automatic stay may apply, mostly if you have filed bankruptcy previously. You should review any possible exceptions to the stay with your attorney. In Chapter 13, you will be able to catch up the mortgage or car loan arrears over the life of your Chapter 13 plan. You must continue to make your regular, on-going mortgage payments after you file bankruptcy in order to keep your house. Vanden Bos & Chapman, LLP can design a repayment plan for those debts with your help.
Can I just refinance my home to save it from foreclosure?
If you have equity in your home, you may be able to refinance in order to save your house. However, refinancing or taking a second mortgage may create an additional mortgage payment that you may not be able to afford. A refinance may effectively eliminate your equity and any value in your homestead exemption. You should consult with an attorney before refinancing to pay off unsecured debts because you may be putting yourself in a worse position in the long run. All of the costs associated with closing a new loan, such as points, fees, title costs, and appraisals, could add as much as $10,000 to the new loan. Chapter 13 may be a better option for you to catch up on any payments that have not been made on time on your home loan. Curing the arrearage through a Chapter 13 bankruptcy will protect your equity and will buy you the necessary time to make an educated decision based on your best options.
I owe taxes to the IRS and/or state of Oregon. How does Chapter 13 help me?
Most types of taxes are usually not dischargeable in a Chapter 7 bankruptcy or Chapter 13 bankruptcy, but in some situations, certain taxes are dischargeable. There is a complicated formula, involving when the taxes were due, when the IRS/ODR assessed the taxes, when you actually filed the returns, and many other factors, that determine whether taxes are dischargeable in bankruptcy. Vanden Bos & Chapman, LLP can meet with you and review any unpaid taxes to determine if the taxes are dischargeable in a Chapter 13 bankruptcy.
If the taxes are not dischargeable, Chapter 13 will allow you to repay the taxes through your Chapter 13 Plan. Penalties and interest on your unpaid unsecured taxes will stop accruing on the date you file your bankruptcy, provided your tax returns were filed by their due dates prior to your petition date. Most tax penalties will be dischargeable in Chapter 13.
Chapter 13 is only available to individuals. If you run a business as a sole proprietorship, you can file Chapter 13 to include the business assets and debts. However, in order to be eligible for Chapter 13, there are limits to the amount of unsecured debt and secured debt that you can owe at the time of filing. As of December 31, 2011, an individual is eligible to file a Chapter 13 petition if the individual's unsecured debts are less than $360,475 and the secured debts are less than $1,081,400. These amounts change periodically so you should check with an attorney at Vanden Bos & Chapman, LLP to verify the exact amounts of the debt limits for Chapter 13 at any given time. If you operate a small business as a corporation or LLC, Vanden Bos & Chapman, LLP may be able help you restructure your business and debts in order to qualify for Chapter 13.
You will need approval from the Chapter 13 Trustee first, and the Trustee will usually grant his or her approval in routine situations. We have assisted many clients with the purchase of cars while they were in Chapter 13. The Trustee will usually approve the use of a credit card if the card is used for business purposes and your employer reimburses you for the charges, or if the charges are paid in full every 30 days. Otherwise, regular consumer use of credit cards is prohibited while you are in Chapter 13.
Can Chapter 13 change my mortgage loan or house payments?
No, with the exception that a second mortgage may be subject to being "stripped off" the property by litigation known as “lien stripping” if the value of the house is less than the amount owed on the first mortgage. A loan that is secured only by your personal residence generally cannot be changed or modified in bankruptcy. Chapter 13 can give you time to catch up on the missed back payments. If you intend to keep your home, you will need to make your regular monthly house payment as it becomes due, even after the filing of your bankruptcy. In most cases, if you are in foreclosure and the lender has accelerated the loan (acceleration means that the lender has declared that the entire amount of the loan is immediately due), you can receive up to three to five years to cure the delinquent payments and force the lender to accept a repayment plan.
Can Chapter 13 change my car loan or car payments?
Yes, if you meet certain requirements. It is Chapter 13 that can help you if you are behind on your car payments or if the lender is threatening to repossess your car. However, even if you are not behind on your car payments, but purchased your car more than 910 days prior to the date of your bankruptcy, Chapter 13 can modify your car payments with what is called a "cram down." A cram down is where you pay the lender only what the vehicle is worth (plus reasonable interest), not the amount that you owe for the car. This is helpful when the car is worth less than what is owed. For example, assume a client’s car is worth $8,000 but the debt is $19,000. In a Chapter 13, this client may get to keep the car by paying $8,000 for it. The remaining balance of $11,000 is discharged, provided you successfully complete the Chapter 13 plan. Vanden Bos & Chapman, LLP can design a Chapter 13 plan, with your help, that will correctly value your vehicle and propose a reasonable payment for that vehicle. Please be aware that you cannot reduce the car debt to the car value unless you purchased your car more than 910 days before your bankruptcy petition date, or if the vehicle was purchased for business use, regardless of the purchase date.
9. What is meant by "lien stripping" of a second mortgage?
Lien stripping is the only instance in Chapter 13 where it is possible to change the terms of a mortgage secured exclusively against the debtor's principal residence. Lien stripping does not apply to first mortgages. Lien stripping is available only for junior mortgages, which means any mortgage that is recorded after the prior (or “senior”) mortgage has been recorded. To qualify for lien stripping, the value of the principal residence has to be less than the amount owing on the senior mortgage(s). This is generally referred to as being "upside down" on your mortgage. If the value of the house is less than the amount owed on the first mortgage, then a motion can be filed in the bankruptcy court to "strip off" the junior mortgages from the property. Once a junior mortgage is stripped off, it is no longer a lien against the house. All amounts owed on the junior mortgage become an unsecured claim in the Chapter 13. If the Chapter 13 is successfully completed, then the unpaid amount owed on the junior mortgage is discharged and never has to be paid. Lien stripping is a powerful tool. It can eliminate junior mortgage amounts owing on someone's personal residence by hundreds of thousands of dollars. A lawyer at Vanden Bos and Chapman, LLP can explain to you in more detail how lien stripping works and whether lien stripping might be a tool available for you to use to reduce your junior mortgage debt in a Chapter 13 bankruptcy.