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Should I File a Chapter 13 Bankruptcy?

This is not an easy question to answer, as it depends on many factors.  So my first bit of advice would be to set up a consultation with an experienced bankruptcy attorney, like Capone & Keefe, so that we can go through the analysis for you.  However, to oversimplify it, the main reasons to consider and file a Chapter 13 bankruptcy would be:

1) To Save your Home: if you have arrears on your home and are facing foreclosure, then a Chapter 13 is a good option for you.  A chapter 13 will stay the foreclosure and give you the opportunity to save your home through your plan of reorganization.  You can propose a cure and maintain plan.  This means that you can resume your regular monthly payments directly to your mortgage company and they would be required by law to accept them, and then you would have a separate payment to the Chapter 13 Trustee, which would be used to cure your mortgage arrears.  You would have 5 years to complete that plan, but at the end you would again be current with your mortgage.  This plan is ideal for someone that had a temporary set back with their income or expenses that caused them to fall behind on their mortgage, but is now back on their feet and able to resume mortgage payments.

There are other ways to save your home and the plans can be very creative.  For example, the plan can propose to obtain a loan modification from the mortgage company.  The Bankruptcy Courts in New Jersey, have a loss mitigation program, which can be applied to after your petition is filed.  Once, the Court enters the Order Approving Entry into the Loss Mitigation Program, the Order would allow you to make an adequate protection to the mortgage company, while you are negotiating the Loan Modification.  The adequate protection payment would allow you to pay only 60% of your normal principal and interest payment to the mortgage company, plus the monthly escrows, pending the resolution of the Loan Modification negotiation.

This is beneficial for a couple of reasons, one it allows the Debtor to resume making a mortgage payment, which shows the mortgage company one, good faith, and two, an ability to make a mortgage payment.  Second, the filing of the chapter 13, and thus the resumption of the mortgage payments,  stops the mortgage arrears from continuing to grow.  All of these factors weigh in your favor when the mortgage company is deciding whether or not to modify your mortgage.

2) To Save or Cramdown your Vehicle: A chapter 13 also allow you the opportunity to catch up on delinquent car payments.  You can even get the vehicle back if it has been repossessed by the lien holder, as long as it hasn’t been sold at auction prior to your filing for bankruptcy relief.

Additionally, if you have been in the financing contract with your lender for over 910 days (2 and a half years) you can cram the vehicle down to its present value. For example, if you owed $15,000.00 on the vehicle, but it was only worth $10,000.00 based on NADA or Kelly’s Blue Book, then you can propose to pay the lien holder the $10,000.00 value plus interest over the life of your chapter 13 plan.  What makes this even a better deal is that if you have a high interest rate, the United States Supreme Court, in In Re Till, held that you can cram the interest rate down to whatever the prime interest rate is at the time of filing, plus a factor of one.  Presently, prime is 3.25%, thus you could propose to pay the lender the $10,000 at 4.25% interest and then lender would have to accept that treatment.

Even if you have not been in your financing contract for more than 910 days, you can still propose to pay your vehicle through your chapter 13 plan, and cram the interest rate down to the prime plus one rate.  Thus, if you are presently in a high interest rate loan, as many of our clients are, a chapter 13 can substantially lower your monthly payment for that vehicle.

3)To Strip off a Secondary Mortgage Lien: Chapter 13 allows you to strip off a secondary mortgage and treat it as an unsecured debt, if there is no equity for the secondary mortgage to attach.  For example, your home is worth $200,000.00, but your first mortgage payoff is $210,000.00 and you have a second mortgage of $50,000.00.  There is no equity after taking into account the amount owed to the first mortgage, thus there is no equity for that $50,000 second mortgage to attach.  Accordingly, the Bankruptcy Code, allows you to treat that second mortgage as an unsecured debt.  Thus, you would not have to make payments on that second mortgage while you were in your chapter 13, and as long as you complete your plan and receive your discharge from the Bankruptcy Court, your a discharged from owing the second mortgage and the second mortgagee would have to discharge the mortgage lien of record.  Meaning that second mortgage would no longer appear on Title  and would never have to be paid, even if you eventually sold your home.

4)You Don’t Qualify for a Chapter 7 under the Means Test: The means test is meant to determine if your household is above or below  the median income in your State.  To determine this, we would take the last 6 months of your household income, divide it to get a monthly average and then multiply it by 12 to get a yearly figure.  If that figure, is below the median income, then you would qualify for a Chapter 7.

However, if you are above the median income, then we would have to perform further calculations to determine if you have any monthly disposable income.  Basically, we take your average monthly household income and deduct all of the allowable monthly expenses as permitted by the Bankruptcy Code.  If this calculation indicates that for example, after paying all your monthly expenses that you have $300.00 of disposable income, you would have to file a chapter 13 and propose a plan that would pay your unsecured creditors at least $300.00 per month for 60 months.

5)You Possess Assets with Non-Exempt Value: A chapter 7 is a liquidation, ,which means that the Chapter 7 Trustee can sell your assets to the extent that those assets have equity/value that cannot be exempted.  In New Jersey, we use the federal exemptions, as the New Jersey state exemptions are minimal.  Thus, before we can determine if you can file a chapter 7, my office would first conduct a liquidation analysis.  If that liquidation analysis revealed that you owned assets that could not be fully exempt and thus, would be in danger of being sold by a chapter 7 trustee, we would not file a chapter 7 on your behalf.  Instead, you could file a chapter 13 and make payments based on that non-exempt equity over time.

For example, if the liquidation analysis indicated that you had $10,000.00 of non-exempt equity in your assets, then your chapter 13 plan would have to provide for payment of at least $10,000.00 over the life of your plan to your unsecured creditors.  This allows you to keep all of your assets, as the trustee cannot force you to sell anything in a chapter 13,  and still discharge the bulk of your debt.

6) Discharge Condo/Homeowner’s Association Fees: If you own a condominium and wish to surrender the property or maybe are already out of the home but the mortgage company has not foreclosed yet, you could file a chapter 7 , but that will only discharge you of the pre-petition condo association fees.  You would still be responsible for paying the post-petition association fees, up until the property is finally sold at a Sheriff’s Sale.  That could be a very long time, as our experience is that condominiums and townhouses are the last properties that mortgage companies foreclose on.  They do not want to take these properties back, because as soon as they do, the mortgage company becomes responsible for paying the association fees.

However, if you file a chapter 13 and complete your plan, a chapter 13 discharge also discharges you of all post-petition condo association fees.  Thus, even if your mortgage company decides that it is going to sit on the foreclosure for 5 years (which we have seen happen many times) the association cannot come after you for the ongoing fees that are accruing.  This is a huge benefit in achieving a fresh start.

These are some of the main reasons to consider filing a chapter 13 petition, however there are many more and your best bet is to not listen to friends or family or even worse, creditors when trying to decide how to deal with your financial burden.  You owe it to yourself and your family to consult with an experienced bankruptcy lawyer and find out what your options are and how a bankruptcy can help you.

Good Luck.

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