Bankruptcy Planning

Involuntary Bankruptcies

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Filing bankruptcy is an important legal right. The Bankruptcy Code provides for six separate types of bankruptcy proceedings. Chapters 9 and 12 are available only to municipalities or family farmers. Chapter 15 concerns foreign proceedings. Chapter 7 is the most often used chapter, allowing both individuals and businesses to liquidate. Chapter 11 and Chapter 13 are 'plan' bankruptcies, requiring payments over time. This section discusses Chapter 13. See our separate discussions on Bankruptcy Planning and Involuntary Bankruptcies.

A Chapter 13 bankruptcy, or "wage earner reorganization" is available only to individuals with regular income. It requires that the debtor file a plan providing for payment to creditors over a period of up to five years. The benefits of a Chapter 13 include the ability to reinstate a home mortgage that is in default, stop IRS collection efforts while payments are made, the ability to retain non-exempt real estate and personal assets, and a broader form of discharge. Pending bankruptcy legislation, the so called 'cramdown' bill, will allow bankruptcy judges to modify mortgages under certain circumstances if the legislation passes. Check back periodically for updates.

Chapter 13 may be a good choice for individuals with home mortgage problems. It allows significant time to reinstate a mortgage in default. It may allow individuals to retain investment properties and other assets that might be lost in a Chapter 7. It may be the only choice for those with too much income to qualify for a Chapter 7. Call us if you would like to discuss whether a Chapter 13 is right for you.

Dischargeability of Second Mortgages in Chapter 13

Most individuals are unaware that they may be able to discharge second and third mortgages in Chapter 13. If your home appraises for an amount less than your first mortgage balance you may be able to strip off all inferior mortgages in a Chapter 13. The second (and possibly third and forth) mortgage is considered unsecured and treated like a credit card. The lender is paid pro rata along with the other unsecured creditors and at the end of the plan the mortgage is stripped off the property. Call us to see if you qualify.