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How Your Property is Affected by a Chapter 13 Bankruptcy

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If you have property that you want to keep after bankruptcy, such as a home or car, you may find that a Chapter 13 bankruptcy might be the best option for you. Filing for Chapter 13 allows you to re-organize your finances by paying all or a part of your debts over time under a 3-5 year payment plan. For example, you could catch up with late mortgage payments and not lose your home. A Chapter 13 payment plan varies from case-to-case depending on your unique financial situation.

Your Home in a Chapter 13 Bankruptcy

Filing a Chapter 13 bankruptcy is a good option for homeowners who are behind on their mortgage payments and need time to catch up on their payments so they can keep their home. You can pay off any late mortgage payments during the length of the repayment plan. You will need enough income to meet your current mortgage payments and your other expenses at the same time you’re paying off your late mortgage payments. If you make all the required payments under your Chapter 13 plan, you can avoid foreclosure and remain in your home.

It is also possible for you to eliminate a second or third mortgage on your home. If your home has dropped in value, your first mortgage is secured by the entire value of the home. So you probably no longer have any equity to secure the second or third mortgage. In that case, a bankruptcy court may “strip off” the second and third mortgages and re-categorize them as “unsecured debt.” Unsecured debts are usually not paid in full in Chapter 13 and sometimes don’t have to be paid back at all.

Difference Between Chapter 7 and Chapter 13 and Your Home

You may be wondering how filing for Chapter 7 would differ from filing for Chapter 13 when it comes to your home. While Chapter 13 can be used to prevent foreclosure in the long term, Chapter 7 provides a temporary relief from foreclosure. Filing for Chapter 7 results in an immediate “automatic stay” that prevents your creditors from taking any action against you such as foreclosing on your home. However, a creditor can ask the bankruptcy court to lift the automatic stay.

Another difference is that in a Chapter 7 bankruptcy the trustee can sell your home in order to pay unsecured creditors. It depends on whether you have enough nonexempt equity in your home to trigger a sale in bankruptcy. You need to determine what amount of homestead exemption is available for your home. Exemptions are state bankruptcy laws specifying the types of personal property and assets that creditors cannot take to satisfy a debt and the bankruptcy trustee is prevented from selling for the benefit of the debtor’s unsecured creditors.

Is Chapter 7 or Chapter 13 Best For You?

You will need to discuss with a bankruptcy attorney whether you should file for Chapter 7 or Chapter 13. Some issues to consider include:

  • Whether you want to keep your home or just delay a foreclosure
  • Whether you have other property such as a car you want to keep
  • Whether you are able or willing to pay for some of your debts through a Chapter 13 payment plan
  • The type and amount of bankruptcy exemptions available to you
  • Your estimated payment under a Chapter 13 plan

Referenced from Start Fresh Today

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