If you are considering bankruptcy, the fear of losing possessions can be enough to make it seem not worthwhile, despite the crushing debt. Most individuals who are considering bankruptcy owe far more than they can pay, with no end in sight. It can become difficult to purchase simple items like food and gas, all while your credit score plummets from missed payments. Fortunately, chapter 13 bankruptcy can help you keep the most important assets, such as your house, as well as help with your debt. In some cases, it is even beneficial to take chapter 13 to help with your housing situation.
What is Chapter 13?
One of the two primary types of bankruptcy filed, chapter 13 serves as a tool for people to get out of debt through a restructuring process. The other main type, chapter 7, eliminates debt through the sale of assets. Chapter 13 is typically recommended for people who are expecting a life change that will improve their financial position; this could be a raise, promotion, or an inheritance. Through the process, all the debts will be collected and instead of eliminated, they will be re-structured into something that the individual can afford. New payment rates will be dictated by the court, which can be a big advantage as the credit companies will not have a say in what happens.
With Chapter 13, you will keep almost all your assets. There are some instances when debt will be discharged, or assets sold, but this is very rare. Chapter 13 also will only stay on your credit score for 7 years instead of 10 years with chapter 7. It is also very easy to build your credit score up after this, as you will already be making payments and building your score up through the restructuring.
Benefits of Chapter 13 on a Home
In addition to the benefits of making your overall debt more manageable, there are specific benefits to taking chapter 13 with your home. For some people, their house may be close to foreclosure and they are not able to make payments. Instead of losing your home, taking chapter 13 can save your home. As soon as bankruptcy is filed, an automatic stay is placed on your assets, meaning that all foreclosure proceedings stop. Creditors are also required to stop harassing you as soon as bankruptcy is filed, giving you some peace and quiet.
In most cases, the repayment plan that is created will have an area that dictates new terms for the mortgage. So even if your house was about to be foreclosed before the filings, the institution will not be able to try to foreclose your home as soon as the bankruptcy proceedings are complete. There are few cases that will continue with the foreclosure even after the repayment plan has been created, but this is rare. Even if the court opts to continue with foreclosure, bankruptcy proceedings can take months, and you will be allowed to live in your home during that time.
If you have a second or third mortgage payment on your home, declaring chapter 13 can also help you eliminate those payments. The way these works is your home, first mortgage, is considered secured debt. If the home has dropped in value, there might not be any equity left, and the other mortgages would be considered unsecured debt. With chapter 13, unsecured debt will be the last priority in re-structuring and will sometimes be eliminated if not significantly reduced.
There is also the added benefit of modifying a mortgage in certain situations. If the debt owed is significantly higher than the actual value of the property, than the court may only make your new payments based on the actual value of the property through a process called a “cramdown”. Say you have a mortgage of $400,000, but your home is only worth $350,000. Assuming you are eligible to receive a cramdown, that $50,000 difference will be placed in unsecured debt. It is important to note that cramdowns are rare, but if you can qualify for one it may significantly help your situation.
What to Do
If saving your home is the only reason for you to take chapter 13, there may be other options you want to explore for this. However, if you have other debts that are too much, bankruptcy is possibly the best option available to you. Consulting with a bankruptcy attorney can be a great way to see what option is best for you and your situation, as everyone will have different needs.
Essentially, your home will be safe in chapter 13, and sometimes it is best to file for bankruptcy to even save your home. The process of bankruptcy is a frightening one but having the right legal team will help you get through the process as painlessly as possible.