Chapter 13: Not Always a Gloomy Diagnosis in Bankruptcy

Inevitably, many people will be told they do not qualify for Chapter 7 and must do a Chapter 13 if they want to file bankruptcy. Often I am the person giving that advice to clients who simply do not have a Chapter 7 option due to their income level or other circumstances that steer them into Chapter 13. However, Chapter 13 is not the worst alternative and sometimes is actually the preferred form of bankruptcy under some circumstances, as is discussed in more detail below.

The first thing to understand is what a Chapter 13 actually means. Chapter 13 involves a monthly plan where payments are made to the Chapter 13 trustee for three to five years. The majority of these payments will be used to pay certain debts in their entirety (for example, some taxes, home mortgage arrears, etc.) and to pay down other debts in a fractional amount of what is owed. At the end of the plan and after making timely payments each month, whatever has not been paid down on “dischargeable debts” (i.e., those debts that would be discharged in Chapter 7), gets discharged in Chapter 13 as well. The net effect of Chapter 13 is usually that most debts will be discharged just as they would be in Chapter 7 however a fraction of what is owed gets paid back to your creditors from the monthly plan payments you make to the Chapter 13 trustee.

The second thing to consider is the monthly Chapter 13 payment, since you will be paying this for three to five years before you can receive a discharge. The amount of the Chapter 13 plan payment is a result of a multifactor calculation that considers your income and expenses to churn out a monthly payment that is reasonable for you to afford. A bankruptcy attorney can calculate what this amount will be for you and if there are any reasons why that amount may change up or down during the Chapter 13 plan. A Chapter 13 plan where the payment changes at some point is often called a “stepped-up” or “stepped-down” plan and is usually the result of known future increases/decreases in expenses such as when car payments ends or property taxes/insurance increase.

Next, consider the advantages of Chapter 13 and whether you can benefit from any of these. Most notably, Chapter 13 provides a way to repay home mortgage arrears 100% over the duration of the plan and regardless of whether the bank likes it or not. Of course, Chapter 13 debtors must continue to make their regular mortgage payments in addition to the Chapter 13 payment in order to stay out of foreclosure, but many mortgage companies are increasingly willing to work with people to modify the terms of their mortgage to make that regular monthly mortgage payment more practical in the long term. And in some situations, second mortgages that are fully “underwater” (that is, the amount of the first mortgage clearly exceeds the value of the home) can even be stripped off in their entirety from the home, leaving you with just your first mortgage. This second mortgage stripping is a recent development in Minnesota bankruptcy law that is thanks to the efforts of local attorneys working hard to ensure that bankruptcy offers real relief for debtors.

If Chapter 13 is your bankruptcy diagnosis, give it a second look and see if it there is a silver lining for you. If you ask the right questions, you may find out that Chapter 13 is an advantageous debt relief option.

Wartchow Law Office advises clients on which form of bankruptcy they qualify for and whether Chapter 7 or Chapter 13 fits their needs best. Contact for a free consultation and more information on options available under Chapter 13 bankruptcy.

Bankruptcy May Increase Your Options in Foreclosure

Foreclosure is a common predicament faced by many people filing bankruptcy, and is an issue that affects homeowners at every income level. If you are behind or “in arrears” on your mortgage payments for more than a couple months, chances are your primary mortgage lender will send you a pre-foreclosure notice demanding that you make payment otherwise they will take legal action. Eventually if the mortgage is not brought current, a mortgage lender will initiate a foreclosure proceeding. Once served with the notice of sheriff’s sale that formally commences a foreclosure proceeding, most homeowners have six weeks until their house is sold at the county sheriff’s office and then six months thereafter to remain in the home through the redemption period*.

If you want to save your home and stop a sheriff’s sale, bankruptcy can help. While both Chapter 7 and Chapter 13 bankruptcy will stop the ticking clock of a foreclosure or sheriff’s sale, Chapter 13 may also help you save your home by providing a way for you to pay mortgage arrears over time through a Chapter 13 payment plan, while still resolving other unsecured debts such as credit cards that may restrict your cash flow. Either form of bankruptcy puts an automatic stay on the foreclosure process—that is to say, it freezes the foreclosure process—from the moment a bankruptcy petition is filed, providing you with crucial time while your sheriff’s sale is temporarily stayed.

Even if you want to move forward without your home, Chapter 7 bankruptcy or Chapter 13 bankruptcy can provide months more time in the house without mortgage payments, truly offering a fresh start and way to rebuild your finances for what’s next. And because bankruptcy is a long term solution to dischargeable debts, you won’t receive a deficiency judgment or taxable 1099 on a foreclosed or short sold property once you receive a discharge in bankruptcy.

If you are in the midst of foreclosure, the best time to take advantage of your bankruptcy options is prior to the sheriff’s sale. Even after a sheriff’s sale, you may still have options to extend the time you can stay in the home and also discharge of the underlying debts.

This website has extensive information on the foreclosure process in Minnesota, what Chapter 13 can do to help you save your home, and how bankruptcy can minimize your debt while maximize the time you can stay in the home should it go through foreclosure.

*The foreclosure process, timeline and other requirements of law vary on the type of real estate owned and the type of foreclosure proceeding commenced by a lender, amongst other factors. The information provided here represents the general foreclosure process in Minnesota and you should always consult an attorney for how the law applies under your specific circumstances.