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ADVANTAGES OF INDIVIDUAL CHAPTER 13 REORGANIZATION
An individual Chapter 13 Reorganization is a bankruptcy option that provides the relief of a bankruptcy discharge with many unexpected benefits. In a Chapter 13 Plan of Reorganization, a Debtor pays all of his or her disposable income into a three or five year plan proposing to pay off certain debts. At the end of the Plan, the Debtor receives a discharge of the remaining debts. A Chapter 7 bankruptcy, by comparison, is a simple liquidation case where someone files bankruptcy and would have to liquidate nonexempt assets to their creditors. There are times, however, when a Chapter 13 bankruptcy is better structured to provide the proper bankruptcy relief instead of a Chapter 7. These include keeping non-exempt assets and as detailed below avoiding junior mortgages, discharging certain nondischargeable Chapter 7 debts, and stripping down car loans.
Avoidance of Junior Mortgages
Pursuant to Bankruptcy Code §§506 and 1325, a Chapter 13 debtor can avoid a second mortgage loan as a lien against their residence. This process, as of now in the Seventh Circuit, cannot be done in a Chapter 7 proceeding. In a Chapter 13 proceeding, if the value of the home, as determined from a recent appraisal, is less than the balance due on the first mortgage then the Debtor can avoid the second (and third if there is one) mortgage. By avoiding the mortgage, the bank’s claim is treated as completely unsecured and the bank is required to remove their mortgage lien upon successful completion of a Chapter 13 Plan. This process provides multiple benefits to debtors including relief to debtors that were approved for a loan modification on their first mortgage but denied on their second and allowing debtors to adjust their debt to reach a point where they are no longer underwater on their home.
Discharge of Nondischargeable Chapter 7 Debts
The granting of a discharge is governed exclusively by the Bankruptcy Code. Section 523 of the Bankruptcy Code governs what types of debts are dischargeable and non-dischargeable. In Chapter 13 bankruptcy there is a broader discharge granted than in Chapter 7. Specifically, section 1328 of the Bankruptcy Code states that certain nondischargeable debts under §523 are dischargeable in a Chapter 13 proceeding. These include property settlement obligations from a divorce proceeding, debts arising from willful and malicious injury by the debtor, and condominium or association fees. A client considering bankruptcy may be benefited by the broader discharge in Chapter 13 as opposed to Chapter 7 and a detailed review and analysis of each person’s situation will determine which Chapter of bankruptcy is most beneficial.
Stripping Down Vehicle Loans
If you owe more on your vehicle than the car is worth, Chapter 13 may also provide unexpected relief. A car loan can also be “stripped down” to its value in a Chapter 13 bankruptcy pursuant to §1322 of the Bankruptcy Code. In your Plan of Reorganization you can propose to pay certain vehicle loans, those obtained more than 910 days ago, the value of the vehicle as opposed to the balance of the loan. For example, you own a vehicle worth $10,000.00 but owe $15,000.00 and have an interest rate of nine (9) percent. In a Chapter 13 bankruptcy you can propose to pay the creditor only $10,000.00 and can reduce the interest rate. Additionally, regardless of when the loan was obtained you can usually reduce the interest rate on the loan if you propose to pay the loan in full in your Plan.
These are just a few of the unexpected benefits of a Chapter 13 reorganization. Providing people with a fresh start is the main goal of all bankruptcy filings and Chapter 13 often provides more strategic, advantageous steps to gain that fresh start than a Chapter 7 bankruptcy.
Need to know more about Chapter 13 Reorganization, contact Tiffany E. Rodriguez today