With the value of real estate property down significantly from just a couple of years ago, many homeowners find themselves underwater with their real estate loans. The value of the real estate may be less than the balance on the first home loan. In these cases, it is possible to “strip” the second, and any other junior lien, on the home in a Chapter 13 bankruptcy and be left with just the first loan.
To accomplish this, homeowners can file a petition for bankruptcy protection under Chapter 13 of the bankruptcy code. A Chapter 13 bankruptcy is a “readjustments of debts” procedure. It is not a liquidation bankruptcy as in a Chapter 7. This means that in a Chapter 13, the debtors can retain all their assets and pay one monthly payment to the trustee to pay down the debt as much as possible. How much that monthly plan will be depends on how much disposable income is available.
A junior real estate loan (any other than the first) is completely unsecured if the value of the real estate is no more than the balance of the first loan. If that’s the case, then debtors will not have to pay the second, or any other junior liens, during the course of the Chapter 13, usually three to five years and after completion of the Chapter 13 requirements, the junior liens will be “stripped”, or extinguished, forever.
The basic requirements of the Chapter 13 are that the debtors commit all their “disposable income” during the term of the plan. Disposable income is the amount of money left after deducting the “reasonable and necessary expenses” from the household income. That disposable income is the monthly Chapter 13 payment that has to be made to pay creditors. Creditors can get anywhere from zero to 100 percent of the balance owed depending on the amount of the disposable income and other factors.
For a free initial consultation regarding these and other related issues including personal and business bankruptcy, please contact attorney Susana B. Tolchard at 661-287-9986.