One of the most overlooked financial tools available to individuals including small business owners today is Chapter 13 of the Bankruptcy Code. Unlike a Chapter 7 which can require liquidation of assets and has very strict eligibility requirements, a Chapter 13 has greater flexibility in eligibility and allows individuals to retain their assets while paying back something to their creditors from future income. Some of the powers of a Chapter 13 Bankruptcy include:
1. Availability of Bankruptcy to High Income Debtors - A Chapter 13 allows individuals who would otherwise not be eligible for Chapter 7 bankruptcy to repay debts to the extent of their ability through a 3-5 year plan. In most cases, Debtors repay between 5-10% of their unsecured debts.
2. Continuing Business Operation- Unlike a Chapter 7 where a trustee can close down a Debtor’s business, a Chapter 13 Debtor has the right to continue operation of the business and has the exclusive right to sell, lease or otherwise use the business assets, in the normal course of operation.
3. Chapter 13 Plan May Modify Secured Creditor Rights - One of the great advantages of a Chapter 13 bankruptcy at this time is ability to strip a lien on your principal residence that does not attach to any equity. Here is a common example: Principal residence has current fair market value of $300,000. The first mortgage has a balance of $400,000 and the second mortgage has a balance of $100,000. Because the second mortgage does not attach to any equity in the property, the lien can be avoided or “stripped” in a Chapter 13 thereby removing the balance of $100,000 at the completion of the Chapter 13 case. In addition, if you have other real property which is not your personal residence, you may reduce the secured claims to the current fair market value if you can pay the fair market value of the real property with the contract rate of interest over the terms of the Chapter 13 Plan which cannot exceed 5 years. Where this makes most sense is on the small rental property. On cars, the Debtor can reduce a loan balance to the fair market value except that a reduction is not allowed on cars used by the Debtor for his personal use if it was obtained within 910 days of the bankruptcy filing i.e. you need to have had the car loan for 910 days prior to bankruptcy filing.
4. Curing a Default - A Chapter 13 Plan can cure a default on a loan with no interest being paid in most cases.
5. Discharge greater than Chapter 7 - A Chapter 13 discharge can encompass many other types of debts which cannot be discharge in a Chapter 7 including criminal matters and taxes. However, the most frequently used provision is to eliminate debts to a spouse, former spouse or child incurred by the Debtor in the course of marriage dissolution or separation except to the extent those debts constitute “domestic support.” What this means is that “hold harmless” provisions on real estate obligations and community property settlements obligations can be discharged.
The above are just some of the advantages of a Chapter 13 bankruptcy case. While it may not be as quick and easy as a Chapter 7, it may provide the debt relief which cannot be obtained with a debt consolidation or repayment plan. If you are considering a default on your home or other debts, I urge you to seek legal counsel as soon as possible to fully understand the consequences of the decision and the options available. I see people for a free 30 minute consultation at my offices located in Walnut Creek, Antioch and Brentwood.
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