Chapter 7 Fresh Start
In theory, filing under Chapter 7 of the bankruptcy code involves selling off your valuable unprotected assets to repay a portion of your debts. Any remaining portion of your dischargeable debts would be wiped out by the court.
In reality, most Chapter 7 cases have been classified as “no-asset” cases. Contrary to myth, the filer’s assets were usually protected by statute, or were of such insignificant value that it would have cost more to sell off, than the assets were actually worth. In such instances, the property was merely abandoned back to the filer – meaning, the filer would get to keep his/her property.
BAPCPA
The fruits of aggressive creditor lobbyists resulted in BAPCPA (the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005″ – pronounced “bapseepah” by those in the know), designed to curtail alleged bankruptcy abuse.
One of the goals of BAPCPA was to steer many individuals away from Chapter 7 and into what’s known as Chapter 13. A Chapter 13 filing requires the filer to propose a plan for at least partial repayment of unsecured debt such as typical credit cards. Full payment of arrears on secured debt is also required over a maximum of five years. Most Chapter 13 cases result in at least a partial wipeout of dischargeable debts.
Whether you would still be eligible to file under Chapter 7 according to BAPCPA, or be steered into Chapter 13, depends on your income, expenses, and what’s actually left over at the end of the month. This analysis is called the “means test.”
Chapter 13: Just What The Doctor Ordered?
Yet, if you’ve fallen behind on your mortgage and you’re trying to save your home, Chapter 7 won’t really help you. Still waiting for that permanent loan mod to kick in? You may be waiting around forever, for something that will never come. Your true knight in shining armor may possibly be to file a Chapter 13 case.
With Chapter 13, you can cure the arrears owed to your bank (or automobile financer) over five years time, provided you keep current payments current. And what about current payments? Keep in mind you’re not the only one feeling the pinch of the real estate market downturn. The last thing your bank needs right now is another foreclosed home on its books.
How about that second mortgage or home equity loan? Under the present laws, if you are so truly “upside-down” on your home – meaning, that the fair market value of your home is less than the amount you owe on your first mortgage, chapter 13 will allow you to strip away those secondary liens. They will be canceled as liens of record against your home, and will be treated as “unsecured” debt (think: credit card debt) and given very low payment priority in your chapter 13 case – often being paid at just pennies on the dollar.
Your first mortgage lender may be receptive to re-negotiating your debt in your Chapter 13 case. Though it won’t get as much as it was promised on paper, it will still be paid. And you? You may be tasting lemons from that adjustable rate mortgage you signed, but a good Chapter 13 plan can help you to keep the roof over that sacred lemonade stand of yours.