Today was a good day for my client, who has been in chapter 13 bankruptcy since January of this year: her chapter 13 plan was approved by the bankruptcy court. When she first came to my office to speak with a bankruptcy attorney , she didn’t know she needed a chapter 13 bankruptcy. She only knew that she didn’t have enough income to pay her debts, and that it was likely that she would never pay them off with her salary from the Orange County School System. She had heard about chapter 7 bankruptcy and thought that would help her discharge excessive credit card debt and give her a fresh start in her financial life. What she didn’t know about is how she could significantly improve the mortgage financing on her home, by stripping the second morgtgage lien. It took me some time to help her understand that a Chapter 13 plan was the best option for her.
Here’s how her plan works: This person had two mortgages on her home. The first mortgage balance was more than the value of the house. This meant that the second mortgage had no equity securing the loan. In a chapter 13 bankruptcy, the court will “strip” that mortgage lien because it is not really a secured debt. The debt is re-classified as unsecured debt, and that mortgage lender is now treated like the credit card creditors. The mortgage lender’s right to foreclosure on the house for non-payment of the mortgage loan is permanently eliminated.
At the end of my client’s plan, which will last for three years, all of her debts will be discharged. Her home, once encumbered by excessive mortgage debt that far exceeded the value of her house, will now have only one mortgage loan that more closely matches the value of the house. When she successfully completes her plan, she will have shed tens of thousands of dollars of indebtedness on her home.
This client will work a little longer on her bankruptcy than a person who seeks an immediate discharge from debt in a chapter 7. She will need to make her plan payments on a timely basis for three years. But she would have had to do that any way to save her mortgaged home. Had she filed for chapter 7, she would have been able to keep her home. However, at the end of the chapter 7, the property would have still be encumbered with two mortgage liens. These mortgage liens survive a chapter 7 bankruptcy. They remain a stain on the title until the debt is payed off – even though that debt has been discharged in bankruptcy. That is because chapter 7 is simply not designed to eliminate or modify mortgages. This can only be done in a chapter 13 plan.
What does that chapter 13 plan look like? The plan payment consists of an amount needed to pay the mortgage payment, plus the trustee’s fees of 10% of that amount. The attorneys fees for the chapter 13 are also spread across the life of the plan in a small monthly payment that makes the plan affordable. Because all of her disposable income is dedicated to the plan, no other payments will be made. This is also known as a 0% plan, because none of the unsecured creditors will be paid.
If you are burdened with unmanageable debt, and own a home that is also burdened with a second mortgage that is not secured by equity, make an appointment to talk to me today about how a chapter 13 plan can help you get your financial life under control. I offer a free 30 minute consultation to anyone who is sincerely interested in learning more about how the bankruptcy laws can help improve their financial life.