It’s easy to fall behind on car or mortgage payments, especially with the challenging economic times we now find ourselves in. Falling behind on these payments can lead to one’s car being repossessed or a foreclosure upon one’s home. Creditors are often not easy to deal with, and frequently, many people find themselves in a position where they are unable to negotiate with the creditor to avoid losing their home or car. However, these people are not helpless. There is a tool available to help them and it’s called bankruptcy. A chapter 13 bankruptcy, in particular, is designed to allow people who fall behind on car or home payments to get caught back up with a court-approved repayment plan.
A chapter 13 bankruptcy case is a three to five year repayment plan of a person’s debts, after which they receive a discharge of their remaining debt (with a few exceptions). Secured debts are those which are tied to certain property as collateral, such as mortgage and car loans, to secure repayment of the debt. When a person falls behind on payments upon these secured debts, the creditor typically has the legal right to retake the property (i.e. the car or home) to sell and pay the remaining debt on the loan. However, from the very day that a person files a bankruptcy case, the bankruptcy court “automatic stay” immediately goes into effect, which prevents secured creditors from being able to foreclose on the debtor’s home or repossess the debtor’s car even when they are behind on payments.
In order for a person’s chapter 13 plan to be approved by the court (aka “confirmed”), the plan must meet certain requirements. The debtor must fully repay certain debts such as non-dischargeable tax debts and past-due domestic support obligations (i.e. child support and alimony). The debtor must also contribute all of their disposable income to the plan. The debtor’s disposable income is the amount they have left after paying all of their normal monthly expenses. Additionally, the unsecured creditors must receive at least as much money as they would have received had the debtor filed a chapter 7 bankruptcy over the life of their three to five year repayment plan. The debtor must also completely pay the entire amount of money that they are past-due in car and/or mortgage payments over the course of their repayment plan if they intend to keep their cars and/or home.
When the debtor successfully completes all their payments, and receives a discharge, they get to keep their car or home so long as they are completely caught up on all their loan payments. While the past-due car and mortgage payments are paid out of the debtor’s monthly bankruptcy payments, the debtor is still responsible for making their current due car and mortgage payments during their bankruptcy case. If the debtor does not continue to make their monthly car or mortgage payments, the car or mortgage lender can file a motion for relief from the automatic stay requesting that the court allow them to repossess the car or begin foreclosure proceedings during the debtor’s bankruptcy case. The court will likely grant the motion if the debtor is actually behind on payments and it can often be difficult to resolve things with the creditor once the motion has been filed. Therefore, it is advisable that the debtor does their best to make both their bankruptcy payments and current car/mortgage payments from the outset of their case.
A chapter 13 bankruptcy is a great tool for allowing people who get behind on car and mortgage payments to get caught up on payments with a court-approved repayment plan. Successfully making all of one’s payments during their three to five year case can be challenging, at times. For this reason, it a very good idea to talk to an experienced bankruptcy attorney before filing a bankruptcy case, and to be represented by an experienced bankruptcy during your case, to ensure you have the best possible chance of successfully completing your case and keeping your car or home.
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