One of the more challenging obstacles for folks to try to overcome in bankruptcy is dealing with secured debt. For most debtors, secured debts mostly refer to mortgages and car loans, although they can include almost any loan that's backed by collateral.
If you're trying to figure out how to hold onto such items while also restructuring your debts, pursuing a Chapter 13 bankruptcy will probably be your best option. Let's take a look at how this might be accomplished under the Chapter 13 bankruptcy law.
Setting up a Payment Plan
When you pursue a Chapter 13 bankruptcy petition, the end game is to assemble a payment plan that you can execute. You will be asking the court to impose a haircut on your creditors in return for the promise that all obligations contained within the plan will be paid on time. Generally, a Chapter 13 repayment plan takes between three and five years for a debtor to finish.
Potential Benefits of Using the Chapter 13 Bankruptcy Law
First, if your objective is to hold onto the assets, there's probably no other way to do it within the bankruptcy system. If you go the liquidation route, meaning Chapter 7, the items used to secure the debts will be returned to the creditors.
A major advantage of Chapter 13 is that it halts all collection, foreclosure, and repossession actions. The court will enter a stay, an order informing creditors to stop harassing you. If you're facing foreclosure, this may be the best chance to keep your house.
In some situations, Chapter 13 bankruptcy will also strip off a junior lien. This refers to additional loans, such as second mortgages and HELOCs. If the court allows it, this can put you in a much better position to pay down the original mortgage.
The court may also allow you to perform what's called a cramdown. If the value of the collateralized item is lower than the current principle you're paying, the court will likely order the principle reduced to the lower amount. This tactic is usually most useful in dealing with car loans, especially ones that are several years old.
In an extremely cratered housing market or on a very pricey loan, you might also be able to perform a cramdown on a house. However, this only applies to loans on investment properties. You can't use the process on a house you claim as your primary residence.
To learn more about Chapter 13 bankruptcy, reach out to a local bankruptcy lawyer.
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