Chapter 13 Requires Greater Commitment Than Chapter 7, But Offers More Benefits Too

A Chapter 13 bankruptcy can provide solutions to clients needing foreclosure help, but it is a greater commitment than Chapter 7. Whereas a Chapter 7 often takes no more than four months to complete, clients filing Chapter 13 are entering into a three- to five-year repayment plan. An individual considering Chapter 13 needs to have a regular source of income to successfully reorganize his or her debt and create a schedule for the repayment of his or her debt, but the plan offers a couple of additional benefits unavailable to people filing Chapter 7.

First, a Chapter 13 bankruptcy can help pay your mortgage arrears over the course of your repayment plan. This can be a boon for homeowners who fell behind on mortgage payments because of a period of unemployment but are now working again. By entering into a Chapter 13 plan, the trustee assigned to your case will distribute your payments to the lender for the arrears. At the end of your plan, you will not only be current on your mortgage, but all of your unsecured debt (like credit card bills, medical bills, etc.) will discharged as well after receiving a percentage of what is owed to them.

Secondly, Chapter 13 also offers homeowners the opportunity to take advantage of a process known as “lien stripping.” With the downturn in the housing market, this is a very attractive option for many of my clients whose homes are worth less than what they owe on their first mortgages. Lien stripping involves transforming a second mortgage or home equity line of credit into an unsecured debt that is discharged through the bankruptcy. As an example, if you owe $250,000 on your first mortgage and have a second mortgage of $50,000, but your home is only worth $175,000, the lien strip will remove the second mortgage and leave you with only the first mortgage to pay back.

Foreclosure can be an extremely unsettling and complicated process for any family to go through, but you should know that you still have options even if you are facing foreclosure. For clients with a reliable source of income, the options above proved to be some of the best reasons to file Chapter 13 in the first place. However, it is important to act fast, as Chapter 13 only works if you file before the foreclosure sale occurs.

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