Chapter 13 Consumer Reorganization

    How Do Chapter 13 Bankruptcies Work To Get You Out From Your Mounting Debt

    Chapter 13 bankruptcies, known as wage-earners bankruptcy, can give a person an opportunity for a new financial start. However, it means the filer will need to pay some of the outstanding debts off. Under the rules of Chapter 13 bankruptcy, the unsecured debts you have is lumped together under one category and a payment plan is developed based on the amount of disposable income you have.

    Even if you have to pay the debts back, you’ll still have enough money to pay for your living expenses such as rent/mortgage, utilities, etc. Once all the payments have been made, you’ll get discharge of all the debts listed in the bankruptcy… even if those payments didn’t satisfy the original balance.

    When you file for Chapter 13 bankruptcy protection, you need to provide the trustee and court a thorough budget. Since it takes time to gather these records to file for your Chapter 13 bankruptcy protection, your experienced bankruptcy attorney can look at your financial standing and organize the case to go before the court.

    Government-owed debts cannot be discharged under Chapter 13, but you can include them because of the benefits you get. Admitting them onto the document will freeze any penalties or interests on your taxes. You can also make payments on the principal, which means decreasing the taxes’ penalties and interests.

    Question: Can A Chapter 13 Bankruptcy Filing Wipe Out A Second Mortgage?

    The short answer to this question is absolutely! According to federal law 11 USC §506 (a), any mortgage beyond the first one is removed and then listed as unsecured debt. In Section 506(a), this second mortgage can only be removed if the home’s value is at or under the balance of the first mortgage. In simple terms: it needs to be underwater!

    For many California cities, the housing market saw a huge boom, which is when homeowners decided a second mortgage was ideal to buy more properties, pay credit card debt off or do some home improvements. However, what happened, was that they bought and refinanced homes that had over-inflated value and were given 80/20 loans for the financing.

    Most of the homes in Orange, Los Angeles, San Diego and Riverside Counties have a second mortgage that is now unsecured.  According to James Zhou, senior partner and bankruptcy attorney with Zhou & Chini Law Firm, this is the ideal time for second mortgages to be stripped so people can get their financial life back on the right track.

    For instance: your home was worth $750,000 but is now worth just $500,000. You have two outstanding mortgages that total $650,000 (first mortgage $550,000 and second mortgage $100,000). This means Section 506(a) can be used. Since your home’s value of $500,000 is less than the first mortgage, you can now take away the second mortgage and note it as being unsecured.

    How Is A Second Mortgage Treated?

    While you’re fulling your Chapter 13 plan, the second mortgage is going to be treated as unsecured debt, and is going to be repaid the same as the rest of your unsecured creditors. Second mortgages are treated like a medical debt or credit card. Keep in mind though that you’ll first deal with the arrears of your first mortgage before you deal with the second mortgage and other unsecured debt.

    How do you eliminate the second mortgage from the property? With the help of an experienced attorney, you’ll need to ask the court for a lien stripping motion.  The majority of courts demand you file the motion so that you can get court order approval to take off the second mortgage. Once it’s been accepted, the second mortgage becomes unsecured debt during the Chapter 13 bankruptcy protection case.

    There’s a catch though – in order for complete removal of the second mortgage, you must carry out your Chapter 13 plan. If it’s dismissed or changed to a chapter 7 bankruptcy filing, the second mortgage lien is not going to be eliminated.