Chapter 13 Bankruptcy
Unlike Chapter 7, Chapter 13 filings do not just wipe out your debts. You will have to make payments over a 3 to 5 year period to the Bankruptcy Trustee, who will then pay your creditors. Typically, these payments to your creditors are less than your regular monthly payments.
A payment plan is developed which will allow you to pay all of your living expenses and secured obligations and a portion of your unsecured obligations. The monthly payment due to the Trustee under a payment plan is based primarily on your income and expenses. If you do not have a regular income, you will not be eligible to file under this Chapter. After the Court approves the payment plan, and all payments due under the plan are made, you will receive the discharge.
Chapter 13 filings are generally used for persons who earn more than the threshold amount set for filing under Chapter 7, have assets over the exemption limits, or have other debts that may not just be simply discharged. In addition, filing under Chapter 13 may allow you time to get current on your mortgage payments (allowing you to keep your home) or alter your payments on your vehicle (allowing you to keep your car). Further, many mortgage lenders have started to negotiate modifications to mortgages as part of the Chapter 13 process.
Removing a Second Mortgage
Chapter 13 Bankruptcy also offers an important, and often unknown, option to consumers who have a residential real estate mortgage, namely, removing a junior lien holder or “2nd” mortgage from your home.
If you purchased a home with 80/20 mortgages or if you took out a second mortgage, you may be able to remove the second mortgage. If the fair market value of your home is below what is owed on the first mortgage, the second mortgage can be removed and the debt associated with it becomes unsecured debt (treated like your credit card debt). In a Chapter 13 Bankruptcy, usually only a small, if any, portion of this type of debt is paid.
We will need to obtain an appraisal and comps to establish your home’s fair market value. We will also need to obtain approval of the court. The mortgage company may oppose this motion. If they do, there may be further court proceedings. At this time, the mortgage companies are not typically opposing our motions to remove the second mortgages.
You will need to make all plan payments to obtain your discharge. Once you have the discharge, the second mortgage is gone.