How Does a Chapter 13 Bankruptcy Save my House?
Chapter 13 Bankruptcy provides individual debtors (including small business operators) with an opportunity to organize and resolve their financial problems. The process encourages the Debtors to adjust the debts, rather than liquidate their assets as in a Chapter 7 case.
To a certain degree, a Chapter 13 Plan will modify creditor rights by restructuring debts (whether secured or unsecured) and the terms pursuant to which a debtor will pay those debts.
A Chapter 13 Plan will cure defaults and reinstate mortgages and other debts so as to save the debtor's home, car, etc.
A Chapter 13 Plan may also rewrite some types of undersecured secured debt by "stripping" the unsecured portion of the debt from the secured portion and splitting the debt into two claims: A secured claim in an amount equal to the present value of the collateral, and an unsecured claim for the deficiency. The plan "crams down" on the creditor's "stripped" claim by making plan payments over the life of the plan totaling the present value of the secured portion of the claim. The unsecured portion of the claim is classified and paid with other unsecured creditors.
What this means to you:
The typical San Diego Chapter 13 Debtor has an income, owns a home and has two mortgages on that home. For simplicity sake we will give the home two mortgages. The First Mortgage is $500,000.00 and the Second Mortgage is for $200,000.00. In today's real estate market the house is only worth $450,000.00.
In this example, we see that the second mortgage is wholly unsecured. The collateral (or house) does not have sufficient value to cover any of what is owed on the second mortgage. Accordingly, this lien can be stripped off in a Chapter 13 and the only remaining debt or lien on the house will be that of the first mortgage holder.
Now, more often than not, the debtor has fallen behind on mortgage payments to the first mortgage holder. Again for simplicity sake, let's say the debtor has regular monthly mortgage payments of $2,000.00 and is ten months behind. The debtor thus has a delinquency of $20,000.00 and is on the verge of foreclosure. Filing for Chapter 13 Bankruptcy protection can give the debtor up to 60 months to get current on the loan. In this case, we would be looking at a $333.00 Plan payment.
The Overall Benefit:
The Debtor's total cost of the house on a monthly basis is reduced to $2,333.00, the second mortgage lien is stripped at the end of the plan. The Debtor now only owes on the first mortgage. As well, if the Debtor's income is only able to support this plan payment, their regular expenses and the first mortgage, there will be very little, if anything available to pay to unsecured creditors such as credit cards.
More and more we are meeting with debtors who are as much as 27 months behind on their mortgage payments. There are a variety of reasons for this, many were unemployed for a period of time and once they got back to work, they could make their mortgage payments but could not pay the entire delinquency at once. The Bank would then refuse to accept payments on an ongoing basis and the delinquency has now grown to the point that the plan payment needs to be as large as the mortgage payment. The debtor can inevitably not afford this and the case is dismissed for lack of feasibility.
The potential debtor needs to seek the advice of an experienced San Diego Bankruptcy Attorney as soon as possible. Too often we also see people who have been holding out for as long as 24 months for a modification that is never going to come. Modification efforts can continue once the Debtor files for Bankruptcy, and the delinquency will stop mounting. Time is of the essence in these situations.
Please call 858 375 1816 to schedule a free consultation to determine whether or not Chapter 13 Bankruptcy can save your house.