Chapter 13 of the United States bankruptcy code allows debtors to retain real and personal property. By design a chapter 13 bankruptcy allows for the full or partial repayment of secured creditors over a three to five year term. Chapter 13 is only available for individuals and married couples however co-signers and third parties that are obligated on the debtor’s liabilities are protected by extension.
Chapter 13 is often called a wage earners bankruptcy. Wage income is not a requirement for declaring bankruptcy under chapter 13; income of any kind can be used to propose a viable and feasible chapter 13 plan.
Debtors in this chapter prepare and file a chapter 13 plan that is confirmed by the bankruptcy judge. The plan outlines the partial or full repayment of qualified creditors over a 36 to 60 month period. Plan payments are made to the chapter 13 Trustee who then distributes the funds to the appropriate creditors according to their respective treatment under the confirmed plan.
The Versatility and Power of Chapter 13 Bankruptcy
During chapter 13 bankruptcy it is against the law for creditors to start or continue collection actions like foreclosure and repossession
By filing for chapter 13 bankruptcy debtors can stop foreclosure, eviction, repossession and any other adverse collection mechanisms such as attachments or wage garnishments. While under chapter 13 protection creditors have no right to directly contact the debtors.
Chapter 13 Plan Treatments for Secured Creditors
Chapter 13 bankruptcy is primarily used to modify secured loans
Secured creditors are lenders holding loans attached to real or personal property. Home loans and vehicle financing fall under this category as do equity lines of credit, jewelry or furniture financing and property attachments or liens. Standard treatments for secured creditors inside a chapter 13 plan are:
Cure and Maintain
Arrears to be cured through the plan, long term debt to be maintained by post petition payments
When a secured loan is delinquent creditors will often reject and return any attempted payments preferring to move forward with reclaiming the property through foreclosure or repossession. By declaring bankruptcy under chapter 13 and proposing a cure and maintain treatment debtors can cure the past due balance over the plan period and maintain the long term debt by making post-petition payments directly to the lien holder as outlined in the original financing agreement or mortgage.
Unsecured or undersecured debt to be crammed down and paid as unsecured debt through the plan; fully secured debt to be paid in full through the plan
When the property securing a debt is valued at less than the outstanding balance on the loan a cramdown treatment can be considered. Full cramdown treatment is best illustrated using the example of a second loan or home equity line that is secured by underwater real estate. If the market value of the property is less than the unpaid balance on the first mortgage, the second loan or equity line can be stripped as wholly unsecured and reclassified as a general unsecured debt.
Additionally a full cramdown treatment can be used to pay the entire value of secured collateral, at a reduced interest rate, abolishing payments under the existing financing agreement. An illustrative example is when a vehicle loan has an unpaid balance that exceeds the resale value of the automobile. Applying the cramdown treatment will reduce the balance of the loan to equal the asset’s current value. The total amount of the revalued asset will be paid at a reduced or equivalent interest rate over the life of the plan.
To determine the savings through this treatment add the immediate principal reduction to the long term interest payment savings.
Entire debt will be paid at a reduced interest rate over the length of the plan
An asset with positive equity that is encumbered by a compounding interest loan can take the interest cramdown treatment. The remaining balance on the existing financing agreement can be paid at a non-compounding lower interest rate.
The cramdown interest treatment may result in higher monthly payments, however the savings are realized through the reduced non-compounding interest rate, and modification of the repayment term.
To calculate the exact dollar amount saved subtract the total interest to be paid through the bankruptcy plan from the total interest that will be paid under the current agreement.
Lien will be removed pursuant to bankruptcy law
Lien avoidance treatment is taken when a creditor has attached a debt to any property of the debtor. In most cases attachments from civil lawsuits brought by creditors and collectors can be permanently removed from the debtor’s property by using this treatment.
Once a lien has been avoided the underlying debt gets placed into the general unsecured non-priority category to be discharged along with similar debts such as medical bills and credit cards.
Collateral will be surrendered to the creditor
This straightforward treatment is used when a debtor no longer wants the encumbered property or collateral. The property is valued and returned to the creditor with any deficiencies grouped with other unsecured claims. In the event the property has positive equity, the proceeds are incorporated into the debtor’s bankruptcy estate and can be used to fund the chapter 13 plan.
Claim will receive no distribution through the bankruptcy plan
Excluding a secured creditor from the bankruptcy plan means the existing financing agreement or mortgage does not require any alteration or bankruptcy treatment. The debtor is expected to provide for the long term debt by directly making payments under the original contract.
Any treatment proposal that is approved by the bankruptcy court and the secured creditor
The versatility and power of a chapter 13 bankruptcy is derived from the treatment of secured creditors under the chapter 13 plan. The provisions in each plan should be specifically tailored to the debtor’s intentions and objectives. In addition to the standard treatments outlined in this article, an experienced and creative bankruptcy attorney can propose a wide variety of options for modifying secured debts under chapter 13 of the bankruptcy code.