Why Everyone Should Consider a Chapter 13 Bankruptcy
When I explain the benefits of a chapter13, the normal response I get is, "Why doesn't everyone do this!?"
Let me start this blog by explaining how exactly a chapter 13 works for people like you and me.
Who can file? EVERYONE*, no matter how much money you make (*there are debt limits for a chapter 13 bankruptcy: $1,184,200 secured; $394,725 unsecured. How much you pay back often depends on how much you make.)
The general idea behind a chapter 13 bankruptcy is to FREEZE your current debt amount, lump it all into a SINGLE monthly payment, then chip away at it for 3-5 years. At the end of the 3- 5 years, you will not owe any more debts except for your mortgage and student loans (and other, less common debts). That’s right, the tens-of-thousands-of-dollars owed on your car, medical bills, credit cards, utilities, payday loans, etc. will all be paid with that SINGLE MONTHLY PAYMENT.
How Chapter 13 Benefits Your House
A chapter 13 will stop a foreclosure all the way until the night before the Sheriff’s Sale.
Want to keep your house? You can catch-up the arrears by taking the arrearage amount and spreading it out over 5 years (60 months). For example, if you fell behind 3 months, you might owe $4,600. Spread that over 60 months = $76/month. At the end of the chapter 13, you will be deemed current on your mortgage going forward.
Want to Surrender your house? You can also do that. You will be able to stay in the house rent-free until the mortgage company is able to go through the foreclosure process and actually sell it (usually around 1 year). Whatever deficiency is remaining after the sale will be included in your monthly chapter 13 payment. If that amount is $40,000 and you’re paying 1%, you would owe $400 over 60 months = $6.66/month.
How Chapter 13 Benefits Your Car
A chapter 13 can recover your car from repossession, even if it has already been repossessed. And it will stop repossession from happening if it hasn’t already been repossessed. It is only too late to recover your car if the car has already been sold at auction (usually about 21 days from the date of repossession).
Chapter 13 can do some great things with a car.
If you own your car free-and-clear, you can keep it.
If you are buying your car and you bought it within the last 2.5 years, the chapter 13 will reduce your interest rate to ~5%, and will spread the remaining balance over 60 months. For example, 2 years ago you bought a 2014 Chevy Impala at 14% interest. Your monthly payment is $415/mo, and you still owe $12,000. The chapter 13 will cut the interest down to 5% and spread the $12,000 out over 60 months for a new monthly amount of $226.45. And remember, this is all included in the ONE monthly payment; so you don’t have to continue to stress about making payments on your car, your credit cards, student loans, payday loans, and all your medical bills every month. That is an awesome benefit of Chapter 13 bankruptcy.
If you are buying your car and bought it MORE than 2.5 years ago, the Chapter 13 will allow you to “cram-down” the vehicle. “Cram-down” means you pay only what the vehicle is worth, rather than what you still owe on it. Assume that the vehicle is a 2013 Chevy and you bought it 3 years ago. You still owe $12,000 on it @ $415/mo, but it’s only worth $7,000. The “cram-down” rules say that you ONLY pay the $7,000 @ 5% over 60 months, or $132/month!! The remaining $5,000 is usually paid at 1% over 5 years which $50/60 months = $0.83/month. That is an amazing benefit of a Chapter 13 bankruptcy.
How Chapter 13 Treats Your Unsecured Debts
Common unsecured debts in chapter 13:
a) Medical bills
b) Credit cards
c) Payday loans
d) Prior repossessions
e) Prior evictions
f) Lawsuit judgments
g) Vehicle accidents
h) Drivers’ License reinstatement fees
These debts are paid back over 60 months, usually at a fraction of what is actually owed. Depending on how much money you make, and some other factors, most of my clients only pay 1% of what they actually owe on unsecured debt. For example, if all your debts add up to $78,000, 1% means you only pay back a total of $780. And remember that’s spread out over 60 months. That’s only $13/month!! And still, at the end of the 60 months, all $78,000 is forgiven! As you can see, chapter 13 offers some incredible benefits.
Put all this together and what do you get?
Prior to the chapter 13 bankruptcy you had a car payment of $415, and you were facing the insurmountable task of paying back $78,000 to about 20 different creditors. You were stressed.
When you file the chapter 13, you combine all your debts and bills into a SINGLE monthly payment, INCLUDING YOUR CAR. In the situation above with the $78,000 of debt and the 2013 Chevy, most of my clients would only pay $216.00/month (INCLUDES THE CAR!).
"Why doesn't everyone do this!?"