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Chapter 13

Chapter 13 is a form of bankruptcy that permits individuals to financially reorganize their debts while under supervision by a federal bankruptcy court. It is different from Chapter 7 in that Chapter 7 eliminates most debt immediately, whereas someone who files under Chapter 13 will work out a plan to pay off some debts. Here is a list of some of the advantages of a Chapter 13 bankruptcy.

  1. Filing Chapter 13 may completely wipe out your second mortgage and you will never have to pay it back. Let’s say your house is worth $200,000. Your first mortgage balance is $220,000 and the second mortgage is $90,00. The $90,000 second mortgage may be completely wiped out. This requires additional motions, hearings and paperwork by your attorney, but in the end, this could be a great way for a fresh start for you after your Chapter 13 plan is completed.
  2. Cram-down car loan – if the current market value of your vehicle is less than the balance that you owe on the loan AND you have had the loan for more than 910 days, you can ‘cram down’ the balance of the loan to the market value of the vehicle at the time your bankruptcy case is filed. Again, you must complete your plan.
  3. Mortgage and auto loan arrearages can be paid through the Chapter 13 plan, enabling the debtor to keep their home and car while making plan payments.
  4. Paying tax debt – may discharge some older taxes, interest and penalties.
  5. Student loans are not dischargeable unless you can demonstrate “extreme hardship”. Examples of extreme hardship would be a total and permanent disability, or if you are collecting a social security disability. (A lawyer can more fully explain what the court will consider extreme hardship.) If you do not qualify for extreme hardship, the interest does not stop. The lender will place the student loan in a forbearance status so that no payments will be due during your bankruptcy.
  6. Set up a Chapter 13 Trustee to which you can make payments for typically three to five years and based on your current income and ability to pay. Some unsecured debts can be discharged or at least stop interest and penalties. There is usually no interest paid on credit card debt during bankruptcy, and most credit card debt is completely discharged.
  7. Note finally that you do not owe any income tax on the money which is wiped out. It is considered discharged. There is very different than a loan forgiveness from your mortgage a bank or a credit card company. In most cases, when you do not file bankruptcy, the amount of the loan forgiveness is considered taxable income by the IRS.

When you file for Chapter 13 bankruptcy, you will file a plan for the payment of your debts. This plan typically gives you 3 to 5 years to pay back the debts you have in arrears, while you continue to pay what you normally would. Payments are made to a Chapter 13 trustee, who oversees the repayment process. A qualified bankruptcy attorney will be able to advise you on the best course of action.