An Overview of Chapter 13 Bankruptcy - How to Keep Your Home!

January 15, 2011 (Press-News.org) Chapter 13 of the United States Bankruptcy Code provides for a reorganization of the debtor's debts through the protection of the Bankruptcy Courts. In a Chapter 13 there is no liquidation of assets, only reorganization of debts. The debtor proposes a plan where the debtor make monthly payments of as much as he can afford over a period of typically either three or five years. If the total plan payments over the life of the plan exceed the amount creditors would receive in a chapter 7 liquidation, the plan will be confirmed and accepted by the court. The payments are made to a bankruptcy trustee who then disburses the funds pro-rata to the creditors.The debtor retains all of his assets and receives a discharge of debts unpaid when the debtor makes the final payment.

The vast majority of chapter 13 cases are filed by homeowners whose mortgages are in default and desire to save the home from foreclosure. The debtor cures the default over a three to five year period through the Chapter 13 plan. This cannot be accomplished in a Chapter 7 bankruptcy.

A Chapter 13 plan may not modify the terms of secured debt other than to cure any existing defaults where the lender's sole collateral is the debtor's residence. In other words the loan cannot be modified, no matter what other attorneys or "loan modification" firms say, there is simply no legal basis for a forced loan modification. The arrearage (or default) may be cured over the period of the plan but the promissory note must be paid in full by the due date. ONLY IF THE LENDER agrees to modify a loan will the terms actually be modified. No bankruptcy court can order this. The lender and the debtor may agree to modify the terms but short of agreement, the plan may not change the original terms.

Also, if the debtor has a junior lien, the debtor may "strip off," a completely unsecured lien on the debtor's residence. For example, assume the residence is worth $400,000, the first lien is $450,000 and there is a second lien for $100,000. The second lien is completely unsecured and the lien may be avoided. Avoidance is the legal term for "stripping off." Once avoided, the debt is treated as unsecured, just like a credit card.

In short, the major benefits of filing a Chapter 13 bankruptcy petition are as follows:

1. the debtor loses no assets whatsoever;

2. the debtor may cure arrearages owed on the home;

3. interest and penalties stop on all unsecured debt including taxes for which no lien has yet been filed;

4. there is slightly less stigma to the filing of the chapter 13;

5. the debtor may be able to strip junior liens from the home; and

6. if the debtor loses his job or is otherwise unable to complete the plan, the debtor may dismiss or convert the case to a chapter 7.

Article provided by The Law Offices of Gerald Wolfe
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