A Chapter 7 Bankruptcy is a great tool to get rid of unsecured debt like credit cards or medical bills. Unless you are going to get rid of a secured asset like a home or a car, a Chapter 7 Bankruptcy will not affect that debt.
For a vehicle, you must reaffirm the debt, which means you have to sign a document that says you can afford the repayment of the debt, and it must be approved by the Bankruptcy Court. This document is called a reaffirmation agreement. If you do not sign it, the lender can repossess the vehicle even if you are current on your payments. This is not required for a mortgage. Only vehicles require reaffirmation agreements. Once the reaffirmation agreement is approved by the Bankruptcy Court, the lender will begin reporting to the credit reporting agency that you are either current or behind on the loan, so you have to make sure you can afford the vehicle before signing the reaffirmation agreement. Because you are not signing a reaffirmation agreement on your mortgage, the lender may not ever again report that you are current, but you will be able to verify that you are current to future lenders by requesting a payment history from your current mortgage lender.
Chapter 13 Bankruptcy is an amazing tool to catch up on your mortgage on your homestead or repay your vehicle at a lower interest rate, and maybe even reduce how much you owe on the car. Second mortgages are also able to be stripped off and paid nothing after the discharge if there is no equity in the property after the first mortgage on your homestead is paid. Even though the value of property has gone up a lot in the last year, many people have taken advantage of the Cares Act which allows a homeowner who has lost income because of Covid-19 to suspend their homestead mortgage payments for up to two years. This was great while it lasted, but when the two years are up, you will be required to pay all the amounts you are now behind (the two years of homestead mortgage payments) or some mortgage lenders will put the principle at the end of the loan. However, because you weren’t making a homestead mortgage payment for two years, the Mortgage lender was paying your property taxes and insurance. It’s unlikely the mortgage lender will put your principle arrearage at the end of your loan if you are behind on your property taxes and insurance unless you pay those amounts to them in full. The point is that in the last two years, even though your property value has increased, so has the debt on the house. The debt includes the amount the mortgage lender has paid for property taxes and insurance. So the equity that might have been built up over the last year may be gone, and if you have a second mortgage on your homestead, you may be able to strip it off if there is now no equity in your homestead after the payment of the first mortgage. The same is true for a Condominium Association or a Homeowners Association. If there is no equity in the property after the payment of the first mortgage on your homestead, you can strip off the maintenance that you are behind. The only catch there is that when you sell the condo or home, you may be required to repay what you stripped off at the time of the sale. Once you receive an order stripping off the maintenance, many Associations do not realize that they can collect what you stripped off during the Bankruptcy. Also, some people have investment property which can be repaid at a low interest rate up to the value of that property.
You may also be able to just pay the value of your vehicle rather than what you owe when you file a Chapter 13 Bankruptcy. There are several ways to do this. The first is you must own the vehicle for at least 910 days. However, most vehicles have equity when you have owned it for two and a half years. But if your original loan was for seven years or the vehicle is not in great shape, you can strip the vehicle down to its value. Secondly, if you are not the primary driver of the vehicle, you will be able to strip the vehicle down to its value. So, if you buy a pickup truck and use it primarily for business, you will be able to strip the vehicle even though you haven’t owned it for 910 days. Thirdly, if you bought a vehicle and it is used primarily by your spouse or child, that vehicle can also be stripped in less than 910 days. Finally, when you are able to strip a vehicle down to its value rather than what you owe, you also reduce the interest to two points over prime interest, which has been 3 ¼% for several years. Therefore, your new interest rate would be 5 ¼% interest. You can have up to five years to repay the new debt on the vehicle. The additional good news with filing a Chapter 13 Bankruptcy is even if you cannot strip the value of the car, you can almost always reduce the interest to two points over prime or 5 ¼%.
Besides the above, there are some income taxes which are dischargeable in either a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy. There are also other taxes you can have which are never dischargeable. For example, sales taxes or employee taxes are never dischargeable. The reason those taxes aren’t dischargeable is because theoretically, this is money someone paid you or you withheld to pay the taxing authority for their benefit. There are other income taxes which are not dischargeable, but you can repay it through the Chapter 13 Bankruptcy with no interest or penalties. In fact, the penalties that have accrued will also be dischargeable. Child support and alimony are also not dischargeable. However, if you are behind on these debts, a Chapter 13 Bankruptcy will allow you to catch up on the arrearages and pay the regular monthly payment through the Chapter 13 Bankruptcy plan. In a Chapter 7 Bankruptcy, equitable distribution is not dischargeable, but is dischargeable in a Chapter 13. You will have up to five years to pay all of your debts, including unsecured debts. However, the unsecured creditors will usually only get a very small portion of what they are owed because Congress, who wrote the Bankruptcy Code, knew it is more important for your survival to pay for your house and car as well as child support and alimony and taxes than your credit card and medical debt. So what Chapter 13 Bankruptcy does, is it reduces some of the debt that you have significantly so that you can afford to repay your important debt, and be able to get a fresh start when the Bankruptcy is finished.
