Making Timely Decisions in a Chapter 13 Bankruptcy

Timing can sometimes be everything when filing a chapter 13 bankruptcy. Therefore, making timely decisions in a chapter 13 bankruptcy can be very important to a filer.

Artwork made for Ray Stannard Baker's (nome de...

Making Financial Decisions Can be Hard

Chapter 13 Bankruptcy 2013 Illustrated Case May be Common

This chapter 13 bankruptcy case was recently shared on a bankruptcy forum website in March of 2013: “…I am in my fourth year of a five year plan. I have paid $25k into the plan with a balance of $7k. Now my house is underwater, and I approached my attorney [about the problem]. He suggested I dismiss my case and refile to strip the $60k amount owed on my second [mortgage]. My current monthly payment is $600 per month. I just can’t see the benefit of going another five years paying $600 per month. I am currently completing my Schedule J (expenses). I asked for the law office to first give me an estimate of my projected monthly payments before I agree to dismiss my case. I can add more expenses to get my monthly down, especially since i modified my first mortgage and the payment is $400 per month less…What to do?”
This particular illustrated case may be rather common in today’s marketplace. Depending on where you live, housing values are still lowering. In other places, they are rising. Apparently, this filer lives in an area where the housing market is still lowering. How could this particular filer have anticipated and prepared for the change?

Chapter 13 Bankruptcy Facts That Might Change the Picture

Here are a couple of facts about a chapter 13 bankruptcy that might change the picture to how you can either avoid a similar situation or correct an existing one:

  • One of the advantages of filing a chapter 13 bankruptcy is that you can strip junior mortgage loans reducing them to unsecured status if they are underwater in value when you file. They become a part of a chapter 13 bankruptcy plan and will be paid like any other unsecured loan in the plan. You are required only to pay what your disposable monthly income will enable you to pay. When your chapter 13 bankruptcy plan is finished, the remaining amount you owe on a stripped junior loan, if any, will be discharged at the end of the bankruptcy. Timing for stripping second mortgages is important because you must decide at the beginning of a chapter 13 bankruptcy plan to strip any or all junior mortgage loans if you intend on doing so, and they are underwater.

  • If you do not strip junior mortgage loans at the beginning of a chapter 13 bankruptcy plan because the value of your house was still above water at the time the bankruptcy was filed, then you must select to dismiss the chapter 13 bankruptcy and refile if you want to now strip the loans because the value the junior loans has decreased. That is the problem this particular filer faced. The value of his home decreased so the value was less than what was owed on the primary loan. He had already filed his bankruptcy plan, so, the only recourse the filer has is to either start over or continue on the same path to finish the bankruptcy plan.

Timing is everything in these type of chapter 13 bankruptcy scenarios. The decision to refile is up to the filer and his or her inclination to extending their plan for an additional five years. The decision is strictly a financial one, just like that of filing bankruptcy.

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