The Bankruptcy Code recognizes that a lien is only secured to the extent of the value of the property.  If the amount of the lien is more than the value of the property, the debt is separated into two parts: secured and unsecured.  During a Chapter 13, the amount of the loan that exceeds the value of the vehicle can be stripped away. 

For instance, if your vehicle is worth $10,000, but the secured auto loan balance is $13,000, the bankruptcy will separate the auto loan into a secured debt of $10,000 and an unsecured debt of $3,000.  The secured portion must be paid in full during the Chapter 13 case, and the unsecured $3,000 amount will be paid along with other unsecured creditors (usually pennies on the dollar, if anything). 

Another potential benefit to the Chapter 13 debtor is that the contract terms can be modified during the Chapter 13 repayment period.  In some cases the repayment period can be lengthened or contract interest rate can be lowered by the bankruptcy court.  Changing the contractual terms can make a significant difference in the ability of the debtor to repay the debt. 

If you are struggling with debts you cannot pay and own a vehicle that is worth less than you owe, you may be eligible to reduce your principle and your monthly payment on your vehicle loan.  Speak with an experienced bankruptcy attorney and discuss how a Chapter 13 bankruptcy can help you reduce your debt and make your finances work for you and your family.

Not so. 

Most debtors emerge from bankruptcy financially stronger and determined to not repeat past mistakes.  Many debtors who receive bankruptcy discharges have steady jobs, no unsecured debt, and low debt-to-income ratios.  Additionally, a bankruptcy debtor cannot receive a second discharge for several years.  That actually sounds like a good credit risk combination, right?  

The federal government recognizes that a person who has recently discharged unsecured debt through bankruptcy has little debt, but must demonstrate a commitment to managing credit in a responsible manner.  That is why the FHA credit guidelines require the debtor to show two years of responsible credit management after the bankruptcy discharge before it will issue a federal guarantee on a home loan.  It is also possible to obtain a federal guarantee after twelve months, if the debtor can show that the bankruptcy was caused by extenuating circumstances beyond his or her control.  An FHA guarantee means that the lender is guaranteed money if the borrower defaults on the loan.  This federal guarantee makes your loan application more appealing to banks and other lenders. 

Rebuilding your credit report and safeguarding your credit score is very important if you want to buy a house after bankruptcy.  Your bankruptcy attorney can provide helpful tips regarding the rebuilding process and help you on the path to home ownership.

For example, let’s say you purchased your home for $400,000, and obtained two mortgage loans. Today your home is worth $300,000 and you owe $305,000 on the first mortgage and $70,000 on the second. During a Chapter 13 bankruptcy case a bankruptcy court can strip away the second mortgage lien on your home because it is entirely unsecured by your home (i.e. the value of your home is not more than the first mortgage debt). The above example is only possible when the second mortgage is not secured at all by the value of the home. If the home is merely under-secured, lien stripping is not authorized. For instance, if the value of the home in our example is $305,001, then the loan is partially secured (by one dollar) and its second mortgage lien cannot be stripped.

By stripping the lien from your home, the second mortgage loan becomes an unsecured, non-mortgage debt. Unsecured debts receive the lowest payment priority during a Chapter 13 bankruptcy and typically receive pennies on the dollar, if anything. If you believe that Chapter 13 bankruptcy lien stripping could benefit you and your family, call me at 339-0222 so that I can advise as to whether you can strip off your second mortgage.

 Example: Debtor is filing a Chapter 13 plan on January 1, 2010 with payments of $500 per month for 5 years.  He has a 401K loan of $250 per month that ends in December of 2012.  He is not currently contributing to his 401K.  The past practice would require that he increase his payment to the Chapter 13 plan in January of 2013 to $750 per month. Under the new opinion, he would not have to increase his payment to the Chapter 13 plan and instead could apply the $250 per month to a 401K contribution.

 The Trustee has asked that in these cases the debtor be required to notify the Trustee within 10 days of the ending of the 401K loan with proof that the amount was now being contributed to the 401K.  If this does not occur then the debtor may be required to turn over the funds to the Trustee as part of the plan payment.

In Re: Seafort and Schuler   08-22380/08-22417