Let’s start by getting a common misconception out of the way first. A Chapter 13 does not mean that you have to pay back all of your debt, nor is it a debt consolidation. To understand how a Chapter 13 works, you must first understand the different types of debt. For bankruptcy purposes, debt is categorized into three types: secured, priority and unsecured. A Chapter 13 can help with all three.
Secured debts are debts that you have incurred and pledged property as security for repayment. The most common examples are house and car loans. If you do not pay your mortgage payment or car payment, the bank can foreclose on the house or repossess the car. Often times people get behind on car or house payments. A Chapter 7 does not have the ability to help get caught up a secured debt. This is when a Chapter 13 can be very helpful.
Chapter 13 & Mortgages
The most common reason why consumers file for Chapter 13 is to catch up on house payments. The payments that you are behind on can be put into your Chapter 13 reorganization plan and repaid without interest over the life of the plan, which is typically between 3 and 5 years. Once the plan is filed, your mortgage lender must stop all foreclosure proceedings. Even if a judgment has been entered, your house can still be saved by a bankruptcy.
Chapter 13 & Car Loans
Another amazing tool that can be used in a Chapter 13 bankruptcy is what is called a "cram down." A cram down is used when you owe more than your car is worth. There are conditions that must be met, and if they are, you could possibly save hundreds or thousands of dollars on your vehicle. There are two other ways your car payment can be reduced. If you have a high-interest loan, your plan can significantly reduce the interest rate. The second way your vehicle payments can be changed is by restructuring your loan and stretching it over the life of the plan. These tools can be used in combination to dramatically reduce your car payment.
Benefits of Filing for Chapter 13
You might be thinking, "How can I pay the mortgage and car payment, even at a reduced rate, if I still have to pay my credit cards and medical bills?" The short answer is that you don't. Depending on your income level and other factors, your unsecured debt may be eliminated entirely or significantly reduced. So what's the catch, you might ask? There is none. Everything mentioned here is provided for by the U.S. Bankruptcy Code. Bankruptcy is not like debt consolidation in which your creditors are simply asked to accept less. Do you think your creditors would ever agree to completely wipe out your debt? Chapter 13 does not need creditor approval; it only needs to meet the requirements provided by law. The bankruptcy code even allows you to deal with income taxes that may be owed. Your overdue taxes can be eliminated, reduced, or paid without interest. A Lake County bankruptcy lawyer from our firm can review the circumstances surrounding your taxes to help secure the best outcome in your case.