Why Should I Consider a Chapter 13 Bankruptcy?

by Natasha Meruelo, Esq.

A lot of persons who come into my office feel overwhelmed by their debt and cannot imagine trying to do the type of bankruptcy, known as Chapter 13, where they have to make a monthly payment to their creditors. The question that always comes up is, why would I want to file for Chapter 13 over Chapter 7?

Strip That Second Mortgage

Believe it or not, there are often many benefits to filing for Chapter 13 bankruptcy over Chapter 7. The most common reason these days is that you can strip your second mortgage in a Chapter 13 case whereas you cannot presently do so in a Chapter 7 case. When bankruptcy attorneys talk about "stripping", we are referring to a process where you prove that your second mortgage or line of credit is completely unsecured and as a result the court grants your request to remove that mortgage lien from your property upon successful completion of all of your Chapter 13 payments. Unfortunately, this process cannot also be used to strip a part of your first mortgage.

Pay Back Taxes Interest Free

But, did you know you can also use the Chapter 13 payment plan to pay off certain debts in full, such as income taxes, interest free? For those individuals that are currently on IRS installment plans and where a substantial part of your payment may be going to interest and penalties, this could make a big difference and also cost you a lot less money overall. 

When you file Chapter 13 bankruptcy, the taxes you owe are determined as of your filing date and do not continue to grow (assuming they are not secured by property). So, if you owe $2,000 including interest as of your filing date, this is what you pay back at 0% interest. Furthermore, only taxes that are considered "priority debts" have to be paid back in full. For these priority debts, in addition to the great interest rate, penalties do not have to be paid back in full (they become unsecured debts like credit cards) and no further interest or penalties accrue on the total amount. 

So, if you are making a payment anyway to the IRS or state taxing authority each month, consider how much further that payment could go in your Chapter 13 payment plan. If you aren't dealing with income tax problems because you don't know how to, then consider utilizing the Chapter 13 process before this debt grows more than it has to be or a tax lien or warrant is field against you. You may also find out from speaking with a qualified bankruptcy attorney, that some of your income tax debts are dischargeable and can be paid back for less than 100% in a Chapter 13 case. 

Get Back on Track With Your Mortgage and Avoid Foreclosure

Chapter 13 also provides individuals with a way to reinstate their mortgage loan and get back on track with their normal payments. For a lot of homeowners who have fallen behind on their mortgage payments, they may be facing what is known as an "acceleration" of their loan, where the bank demands all of the loan be paid to avoid a foreclosure. This is basically impossible for most persons facing this problem. But, what if you could take that amount you are behind on and pay it off over 60 months and resume making your normal payments at the same time? This is possible in a Chapter 13 bankruptcy. So, if you owe $20,000 to your mortgage company and cant come up with the whole amount now, think about whether you could come up with $333.33 each month to deal with this. It may be better to pay your mortgage company back that money each month than continuing to make that car payment or credit card minimum payments each month. 

What Happens to My Other Debt Payments When I File Chapter 13?

The general rule of thumb is, if you want to keep it, you're going to have to keep on paying for it. So, car payments, HOA dues or maintenance, mortgage payments, utility bills, and every day living expenses are things you are going to have pay for each month. You also must keep on top of any child support or domestic support payments you have been court ordered to pay.

What you're not going to be paying for each month is credit card minimum payments, income tax installment plans, personal line of credit payments and a second mortgage payment (if your attorney determines you can strip this mortgage). All of the "disposable income" you used to commit each month to these bills is now going to be going to the Chapter 13 plan and will be broken down and distributed to the right creditors by the Trustee.

Overall, a Chapter 13 bankruptcy can be a great way to organize your debt and take control over your life. While it is true that you are repaying your debts, some of these debts are debts that you actually want to repay anyway but couldn't figure out how to do so before. Don't brush aside Chapter 13 just because it means you have to come up with money each month. It may be the best money you ever spent!

Questions or interested in a consultation about your case? Email me at meruelolaw@gmail.com or call me at (914) 517-7565.