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Your Property in Chapter 13 Bankruptcy

Chapter 13 bankruptcy provisions are intended to stop foreclosure, repossession, wage garnishments, lawsuits and creditor harassment. These provisions allow a debtor to consolidate, prioritize, repay, and, in certain cases, reduce or eliminate old debt while receiving dominant protection against creditors. It enables to deal multiple creditors and bills in a single repayment plan approved and managed by the bankruptcy court.

Chapter 13 bankruptcy is also known as personal reorganization bankruptcy. It is entirely different from Chapter 7 liquidation bankruptcy. In Chapter 7 bankruptcy, the trustee liquidates the debtor’s assets and distributes the money among creditors within a short span of time. However, in Chapter 13, the debtor can protect his/her property through a court approved repayment plan spreading over a period of three to five years. In that three to five year repayment plan, the debtor can eliminate the arrears in the mortgage payments. In this step, the debtor shall have enough income to meet his/her current mortgage payment, other basic expenses and the mortgage arrearage.

Chapter 13 bankruptcy helps the debtor to eliminate the payments of second or third mortgage. This happens because the first mortgage has been secured with the entire value of the property and the debtor has no other equity to secure the subsequent mortgages. Therefore, the bankruptcy court may eliminate the payments for the second or third mortgage from secured category to unsecured claims. According to Chapter 13 bankruptcy, unsecured debts have last priority and generally they are not paid in full or not paid back at all.

Chapter 13 bankruptcy enables the debtor to delay or prevent the foreclosure proceedings until the approval of debtor’s repayment plan by the court. This step enhances an automatic stay in the foreclosure proceedings. If the debtor includes payment provisions for his/her mortgage arrearage in the repayment plan and gets approval from the bankruptcy court, the creditors are bound to withdraw their foreclosure proceedings. However, if the debtor has filed another bankruptcy petition within the past two years and has availed an automatic stay, the subsequent filing under Chapter 13 bankruptcy will not halt the recent foreclosure proceedings. This is a legal measure to prevent debtors from filing a series of bankruptcy petitions just to hold the foreclosure proceedings.

In certain cases, the debtor may fail to include payment provisions for his/her mortgage arrearage in the repayment plan, and the creditors can continue their foreclosure proceedings. If the debtor does not want to include his/her property as part of the Chapter 13 bankruptcy and moved for a bankruptcy, the debtor can avail a reprieve from foreclosure for several months. During that period, the debtor can enjoy the occupancy of that property. Moreover, in most cases, the bankruptcy court may grant many chances to propose a feasible repayment plan to the debtor and there by prolonging the confirmation process. The delay in the confirmation process gives ample time in delaying the foreclosure proceedings.

Chapter 13 bankruptcy court can modify certain secured debts if the amount due is greater than the present market value of the property. In this circumstance, the excess amount due over the property value becomes part of the unsecured debt of the debtor and treated as non-priority debt. This is known as cramdown process. The cramdown process is applicable in certain cases such as-

• the mortgage is made for any multi-unit building

• the actual mortgage loan is made for some other complexes or maybe property or home certainly not part of debtor’s own residence (like any farm)

• the actual mortgage loan is made for any portable residence that may be considered to be personal property

• the actual mortgage loan is not collateralized exclusively because of debtor’s residence

If the Chapter 13 bankruptcy court applies the cramdown process in the aforesaid situations, the debtor will have to pay off the entire crammed down loan through his/her Chapter 13 repayment plan.

Inside Your Property in Chapter 13 Bankruptcy