Can a Chapter 13 Plan Help This Family?

Posted on August 20, 2015 at 9:20am by

Emerging from a Downward Spiral of Debt with Bankruptcy

Many people who are thinking about filing for bankruptcy have fears about long-term consequences, specifically damage to their credit ratings. However, when a person is in a downward spiral of debt, filing for bankruptcy can repair credit faster than not doing so.

For example, let us say Bob, a local Kansas City college professor, has two mortgages and a home valued at $200,000 due to a downward turn in the real estate market. The first mortgage is $225,000 and an equity line of credit he took out to add an addition for his mother to live in was $50,000. In this scenario, Bob is considered “underwater” on the first mortgage.

Bob’s wife recently has suffered some medical troubles and lost her job. Due to the loss of this family income and the medical bills piling up, Bob has been having trouble making payments for the two mortgages. Although he and his wife drive older cars, they still owe car payments on both vehicles. He is only paying the minimum on his credit card and student loan payments for debt he took out on his two college-aged children. The utility bills are often paid late when the utility company threatens to cut off service. Various collection calls are now haunting Bob’s cell phone and land line when payments are late or skipped for a month due to necessity.

Does this scenario sound familiar? Unfortunately, this is the reality for many people struggling to make ends meet by living paycheck to paycheck and barely scraping by to meet family obligations. Filing for Chapter 13 bankruptcy might be able to help Bob and his entire family from mortgage default, foreclosure, car repossession and the non-stop collection calls and letters.

What Are The Benefits Of Chapter 13 Lien Stripping?

Lien stripping refers to the action of removing second or junior mortgages of home equity lines of credit. A homeowner with multiple mortgages who owes more on the first one than what the house is worth might be able to discharge the additional mortgages in Chapter 13 (“stripping off” the junior liens.) During Chapter 13 bankruptcy, first mortgages would take priority in being paid back as a secured debt and the junior liens would be stripped from secured to unsecured.

Bob’s situation is special because he might be eligible to strip his second mortgage to an unsecured debt. Then, at the completion of the Chapter 13 payment plan, the junior lien could be discharged completely, leaving only the primary mortgage on the home.

What Are The Benefits Of The Chapter 13 Cramdown?

In addition to having mortgage problems, Bob is also struggling to pay back his auto loan. Needing a ride to get to his job, Bob bought a slightly-used Honda four years ago at $25,000. In 2015, his car is now valued at $13,000, but his loan balance is now $17,500.

The Chapter 13 cramdown works a lot like lien stripping. Bob signed the loan more than 910 days ago and owes more than the car is worth. If filing for Chapter 13 bankruptcy were successful, Bob could turn the additional $4,500 into unsecured and dischargeable debt. A car “cramdown” takes the loan on the car and “crams it down” to the fair market value of the car.

What Are The Consequences Of Keeping Unmanageable Debt?

If Bob’s attempt to file for Chapter 13 bankruptcy were successful, he could potentially discharge $54,500 worth of debt (this does not even include credit cards and medical bills, also potentially dischargeable.) Getting rid of such a large amount of debt would free up money for Bob to make timely monthly payments on his first mortgage, household bills, utilities, car payments and student loans. If Bob had not filed for Chapter 13 bankruptcy, all of his other debt would have grown, possibly defaulting on his obligations and further hurting his credit.

Bob’s story can be used as an example of why it might be harmful in the long-term to put off filing for bankruptcy. To understand your options to get out of a debt spiral and emerge better off on the other side, speak to a bankruptcy attorney in Kansas City.

The Sader Law FirmBankruptcy Attorneys Serving Kansas and Missouri