A Chapter 13 bankruptcy can help save a home
Deciding to file for bankruptcy is a difficult and challenging decision. There are numerous advantages to filing for a Chapter 13 bankruptcy, including the ability to stop creditor harassment and gain additional time to organize finances.
Another main advantage to filing for a Chapter 13 bankruptcy is the ability to stop home foreclosure. A Chapter 13 bankruptcy is often an ideal solution for individuals who earn a steady salary but are still facing home foreclosure.
Payments are made in order of priority with Chapter 13 bankruptcy
Once an individual files for a Chapter 13 bankruptcy, an automatic stay goes into effect. An automatic stay halts any further collection attempts from creditors. It also provides an individual with time to step back and assess his or her current financial situation. An automatic stay also stops the foreclosure process. Lenders cannot take any further action without permission from the court.
A Chapter 13 bankruptcy usually remains in effect for three to five years, depending on specific financial circumstances. An individual retains discretion to determine the time period, provided there is enough money to make past due payments as well as keep up with current mortgage payments.
An income-based monthly repayment plan is set up with a Chapter 13 bankruptcy. Payments are made to an appointed trustee who is responsible for distributing the payments to the appropriate creditors.
Payments are made in order of priority. Secured debts such as mortgages are paid first. Unsecured debts are paid next, usually beginning with income tax payments. Any remaining unsecured debts such as medical or credit card bills are paid last.
Payments that are kept current provide an individual with a way to complete the process while keeping his or her home.
Effect on taxes and second or third mortgages
A Chapter 13 bankruptcy also provides a way to successfully remove second or third mortgages. These mortgages are classified as unsecured debts if the home value is lower than the balance of the first mortgage, since there is not enough equity to secure the second or third mortgage debt.
Since unsecured debts are paid last, this means that the second or third mortgages often end up being paid at less than the full rate.
A Chapter 13 bankruptcy also provides numerous tax advantages. During the foreclosure process, any difference between the amount of money borrowed for second mortgages or home equity loans and the amount paid back is taxable.
The exception is money that is used for home-related items. However, many people do not use the money for this purpose. If the money is discharged in bankruptcy, it is no longer taxable. This potentially saves an individual a significant sum of money.
An individual facing foreclosure and considering bankruptcy needs an experienced bankruptcy attorney. The bankruptcy process is often complex and requires a realistic perspective about achievable goals. A skilled and knowledgeable bankruptcy attorney can assess the situation and help develop creative legal solutions.