People filing personal bankruptcy have credit card, medical bills and other unsecured debt that has reached the breaking point in their financial lives. They can no longer keep up with payments and will likely never be able to pay off the debts entirely.
They may be considering filing Chapter 7 or Chapter 13 bankruptcy and wondering what is the best solution for getting their finances under control and their financial lives back in order.
What many don’t know is that through a Chapter 13 bankruptcy filing, you can actually restructure past due home and/or car loans dramatically reducing the amount owed. Ultimately, much of these overbearing loans may even be discharged and you can keep the vehicle or property, which will be restored to a true asset instead of a growing deficit.
I am going to explain 3 ways chapter 13 bankruptcy can save your home and car.
1. Mortgage Cramdown on Your Vacation Home or Rental Property
If you are filing a Chapter 13 bankruptcy because you want to keep all of your personal and investment property which is commonly multi-family structures, you may be able to take advantage of the cramdown provisions in the Bankruptcy Code.
If, for example, you have a three family house used as a rental property that is worth $275,000 upon which you owe $355,000 in mortgage debt, then you are losing money on that investment property. Your trustee can cram the loan down to the fair market value of the property.
this would save you $80,000 in principal debt. In addtion your trustee may elect to reduce the interest rate as well saving you even more in the long run.
A mortgage cramdown is a powerful tool that only a Chapter 13 can provide.
However, the property in question cannot be one used as your principal residence that is why they are a good option for those with three family or multi-family homes used as rental properties.
In addition, you will need to pay off the newly adjusted (crammed down) loan while inside your Chap. 13, which is either 3 years or 5 years.
2. Lien Stripping
What is “lien stripping?”
Lien stripping is a process allowed through a Chapter 13 reorganization bankruptcy whereby junior mortgages or home equity loans (HELOCs) are stripped from secured debt status and put into your unsecured debt pool.
Your chapter 13 bankruptcy trustee must recommend this and the judge must approve and order the lien/s to be stripped.
Basically, if your home has a second mortgage or HELOC that is no longer supported by equity in the property, then it is unattached from the collateral -or “stripped,” and put into the same pool of unsecured debt as your credit cards.
Because unsecured debts are the lowest priority for repayment in personal bankruptcy, it’s common that you would repay only a small fraction of what was owed on the 2nd or 3rd mortgage, with the brunt of it being discharged once your Chapter 13 is completed.
3. Cramdown Restructure of Vehicle Installment Loan
Again using a Chapter 13, you might be able to cram down your installment loan on your truck or car to its fair market value by restructuring the length of the loan and the interest rate.
This option can apply if you took out your vehicle loan over 910 days prior to filing bankruptcy, or roughly 2 ½ years before your filing date.
Chapter 13 is mainly about restructuring your debts so you can keep your property.