If your lender is threatening to take back your property because you’ve fallen behind on the payment, Chapter 13 bankruptcy can help. Filing for Chapter 13 bankruptcy will stop the collection action in its tracks. You can then propose to catch up on payments over a three- to five-year repayment plan.
Simply put, when you take out a large loan, the money lender will want to get paid. The lender protects itself by requiring you to put up the purchased property as collateral, such as a house, car, or business equipment.
How does this benefit a creditor?
If you fail to make your payment on time (default), the lender can take back the property through foreclosure or by repossession, sell it at auction, and apply the proceeds to your balance. And, in many instances, continue to pursue you for any remaining balance.
In bankruptcy, this type of debt is known as a secured claim. Claims without collateral backing, such as credit card balances and medical bills, are unsecured claims.
Although it’s possible to stop such proceedings by bringing your account current, most people don’t have the money to do so. Fortunately, there’s another option. Not only will Chapter 13 bankruptcy stop a collection action in its tracks, but you’ll get the time you need to catch up on your overdue payments. The best part? As long as you fulfill all requirements, there’s nothing that the lender can do to stop it.
You can learn about the actual experiences of other bankruptcy filers in Can I Keep My House and Car in Bankruptcy? What Readers Had To Say.
As soon as you file your bankruptcy case, the court stops most creditors’ attempts to collect against you—including foreclosure and repossession proceedings—by issuing an order called an “automatic stay.” The stay gives you time to prepare and submit a three- to five-year debt repayment plan to the bankruptcy judge for approval.
You’ll start making your proposed payments one month after you file. If the court approves your plan, you’ll continue to your court-ordered plan payment and keep your property. Otherwise, the bankruptcy trustee appointed to handle your case will return any payments to you.
Here are your secured claim options.
Sometimes you don’t want to keep the property—especially if you can’t afford it or you owe more than it’s worth. (Although it might be worth your time to read How to Strip a Lien off Your Mortgage in Chapter 13 Bankruptcy. You’ll find a similar procedure for car loans explained below.)
If it makes sense, you can surrender the property to the lender. You’ll pay off the portion of the debt that you can afford (according to the bankruptcy rules) in your repayment plan. Once you complete your plan, you’ll be free of any remaining balance. The obligation will be discharged (wiped out).
Sometimes you fall behind on a payment but want to keep the property. In that case, you can propose a payment plan that will pay the past due amount while you continue to make the regular monthly payment. For example, if your monthly payment is $2,000 and you have $10,000 in arrearages, you’ll pay $2,166 per month over the course of a five-year repayment plan (plus administrative fees).
In some jurisdictions, the bankruptcy court will require a “conduit” plan, which means that you’ll include the house payment in your monthly plan payment to the court. In other jurisdictions, you’ll make your house payment directly to your mortgage lender and pay only the past due amount through your payment plan. Once you’ve made all the payments in your three- to five-year plan, you’ll be caught up on your mortgage.
Catching up on late car loans works the same way as your home mortgage with one exception: Depending on the age of the loan, you might have more options.
Here are your choices.
It’s unusual to have other types of loans in Chapter 13 bankruptcy. If that’s the case, it’s likely that you’ve personally guaranteed a secure business loan. You’ll want to talk with a Chapter 13 bankruptcy attorney about your options.
Chapter 13 bankruptcy will work only if you have enough income to cover your living expenses and catch up on past-due property balances. It doesn’t stop there, however. If you have “priority” debt, such as back taxes or unpaid support obligations, you’ll have to pay even more because your plan must provide for priority debt in full.
Example. After becoming sick, Rhianna fell behind on her car payment. She also owed $50,000 in unpaid taxes that she racked up after selling real estate during the last housing boom. She contacted an attorney about filing for Chapter 13 bankruptcy and learned that she’d need to pay all of her overdue taxes in a repayment plan (unless an exception allowed her to discharge taxes) because taxes have priority status in bankruptcy. Because her $2,000 per month income wouldn’t cover her monthly living expenses and the anticipated monthly plan payment of $950, the attorney advised her that she wasn’t qualified to file for Chapter 13 bankruptcy.
(To find out about the bills you must fully provide for in your plan, see Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.)
There’s a good chance that you won’t need to pay all of your debt in full, however. You’ll pay unsecured debt—such as credit card balances and personal loans—with your “disposable income,” or, the amount left over after paying your living expenses, secured loan payments, and priority debt. If you have $100 of monthly disposable income, then the trustee will divide $100 among your unsecured creditors.
Example. Charles wanted to save his house from foreclosure but worried that he wouldn’t be able to afford a Chapter 13 repayment plan because of the $150,000 he owed in nondischargeable student loan debt. He met with a lawyer and learned that he could pay less on his student loans in a Chapter 13 plan than his usual payment. With more income available, he could catch up on his mortgage and keep his house.
Because certain debts receive different treatment in bankruptcy, proposing a workable repayment plan can be difficult, and most courts prefer that you hire local counsel to assist you when filing for Chapter 13 bankruptcy.
