Chapter 13 gives you more options than Chapter 7 when it concerns your home and car.
Video Transcribed: This is Edward Kelley of 888-Debtline answering your bankruptcy questions. We’re in the middle of our series on Chapter 13’s. So, today, we’re going to talk about how can a Chapter 13 save my home or my vehicle from foreclosure or repossession, respectively?
So, first, the house. So, even if you don’t … even if you make money such that you would qualify for Chapter 7 liquidation, which is generally what you’d want to do if you can, and if you don’t have any property that you’re worried about losing. You may still want to do a 13 because it affords you several powers that a Chapter 7 does not.
For example, if you go into a Chapter 7 and you’re behind on your house, but you want to keep it, you’re going to be out of luck. You’re either going to have to surrender it or have somebody catch it up for you as a gift. Bear in mind, not as a loan if grandpa catches up your house, but it’s a loan, you’ve got to put him in your bankruptcy as well as an unsecured creditor.
Just a side note, we’ll talk about this in another video, a discharge in bankruptcy does not mean you can’t pay back loans. You certainly can’t do it during a bankruptcy. But if you want, out of the goodness of your heart, to pay someone after the bankruptcy, you’re allowed to do that. They could just never collect it from you.
Okay, enough of that digression. So, let’s say your house is $5000 behind. Let’s say $500 a month is your mortgage payment and you’re 10, 10 months behind just to make it an easy number. So how does Chapter 7 allow you to catch that up? Well, the first kicker is you’ve got to be able to afford to catch it up. But a lot of people can’t.
I have seen in my practice that many banks are extremely difficult to work with once you get behind, especially once they’ve filed foreclosure. Although they will offer loan modifications, it’ll take forever to process it and than they’ll ultimately deny you or if you’re trying to give them payments to catch it up, often they won’t even take it.
In many cases, although they can’t and won’t admit this, its in their interest to foreclose upon you because without a bankruptcy they can then go after you personally for the auction difference and, in many cases, the same house maybe flipped over and over again by the bank through multiple foreclosures.
So, the bank may not want to help you, even though, of course, they’re going to tell you they do and of course, once you go into a foreclosure, now you’ve got attorneys involved, attorney fees, all kinds of costs and it becomes harder and harder to catch things up. So what does a Chapter 13 do?
Well, as of the date of filing, it imposes what’s called the automatic stay which is an absolute bar to any collection. So, it stops the foreclosure and this applies to judicial proceedings, nonjudicial proceedings alike. It stops the foreclosure. It stops any remedies that the bank may have outside of foreclosure. You know, this applies to vehicles although that’s a simple repossession process. Same basic principle.
once you file, automatic stay goes into effect. So immediately, you’ve got breathing room. Now, I, as your attorney or whoever your attorney is, will find out from the bank exactly how far you’re behind and they will file what’s called a proof of claim and, of course, they’ll probably stick it to you as much as they legally can but assuming that they are claiming valid fees and expenses in arrearage, I would determine for you, okay, your $5000 behind. It’s not going to be an easy number like that, but we’ll just use that for the sake of argument and your regular mortgage payments is $500 a month.
Now, this varies by district, but for example, in the Western district of Oklahoma, if you’re behind and you want to do a Chapter 13, the trustee is going to make you pay your regular mortgage through your claim. So from then on, your $500 will be paid as part of your plan, and then your arrearage will be spread out over the life of the plan. Now, it will be a higher priority debt than your unsecured creditors so you may end up simply paying that arrearage and not paying your unsecured creditors anything. They might end up being treated just as if they were in a Chapter 7. That depends on your disposable income, which we’re going to talk about in the next section.
So, I’m looking away to use my little calculator here. So, let’s say that you … and here’s another common misconception that you have to do a five year plan. Now, if you’re … if you would qualify for a seven and you’re only doing this to save your house, you can do what’s called a three year plan. You know, it’s based upon your household income. If you were allowed to do a seven, but have to do a 13, you can do a three year plan, 36-months instead of five years, or 60-months.
So let’s take your $5000, divide it by 36, and we’re looking at $138 a month over the life of the plan. Rest of the math is simple. You add in the $500, you’re now going to pay $638 to the trustee for 36-months, or three years, and out of that, the trustee will pay your mortgage directly. Won’t … it’ll just come out of your check. You won’t have to pay the mortgage company. In fact, they can’t because of the automatic stay, and they will pay that $138 a month and at the end of 36-months, house is caught up and paid. So as long as the plan is what they call “feasible” meaning that you have enough money to make that $638 payment, house is saved.
You’ll never deal with foreclosure. I’ll be the only person dealing with anyone so, as long as you make your payment, mission accomplished. So, same thing with cars. We can use the same numbers, make it a little lower. You’re $1000 behind on your car. So, you enter into your Chapter 13 plan, and in fact, depending on when you bought your car, you may be able to seriously lower your interest rate and even, what they call, cram down the actual value of what you have to pay on the car, the total amount. We’ll talk about that before this series is over.
But, let’s say your $1000 behind, your regular car payment is $400 a month, so let’s take that $1000, divide it by 36-months. $27 a month. What did I say? $400 for your regular payment? $427 a month and you get to keep the car! During the life of the Chapter 13, they can no collect so as long as you do that, by the time you leave the plan, you’re done! And if your loan pays off anyway, you know, if it’s less than a three year loan, less than the life of the plan, then by the time you walk away your done. So, hopefully this will help you understand the powerful tools that you have in a Chapter 13, and again, we’ll talk before this series is over about another powerful tool, the cram down.