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Bankruptcy

 

What is Chapter 7 bankruptcy?

Chapter 7 Bankruptcy is named from the chapter of the Bankruptcy Code which can be found at Chapter 7 of Title 11 of the United States Code.

Chapter 7 bankruptcy is designed to give the debtor a fresh start. In Chapter 7 bankruptcy all dis-chargeable debts will be canceled. Creditors are prohibited from trying to collect any pre-bankruptcy debt in the future. Most people get to keep all of their property including their home in Chapter 7 bankruptcy.

While filing a Chapter 7 bankruptcy may seem simple, knowing all existing options, filing the proper court documents and understanding how to protect your property through the bankruptcy can be confusing and overwhelming.

How it works?

Before a bankruptcy petition can be filed with the bankruptcy court, in most cases the filer has to pass the means test. Before the changes to the bankruptcy code in 2005 most filers could chose the type of bankruptcy (Chapter 7 or Chapter 13) that suited their particular goals. Credit card lobbyists pushed through changes to the Bankruptcy Code, which made it much harder for consumers to cancel their entire debt. Instead, more and more people are forced to repay part of their debt over a three- to five- year period. To find out whether a consumer can cancel all of his debt under Chapter 7, the consumer must first calculate his/her current monthly income. This figure must be compared to the median income for the size of the consumer’s household in Virginia. If the current monthly income is higher than the median income in Virginia, the filing of the bankruptcy petition will be presumed to be an abuse of the bankruptcy process unless the consumer can show that they passed the means test.

What Is Chapter 13 Bankruptcy?

When someone files for bankruptcy under Chapter 13 of the Bankruptcy Code, their aim is to have the opportunity to repay some or all the debts in their name, in better terms, i.e. lower or no interest. Unlike Chapter 7 which involves liquidation of assets, this process involves restructuring debts which allows the debtor to use whatever income they may have in the future to pay off the creditors. Filing Chapter 13 Bankruptcy is thus applicable for a debtor who has a regular income, and thus can afford to request for such adjustments or reductions.

The United States Bankruptcy Code gives the debtor a ceiling of 5 years, within which the creditors must be paid back. While the attorney will safeguard your interests, the entire process is carried out under the supervision of the courts.

Remove Second Mortgage in Chapter 13 Bankruptcy

Chapter 13 Bankruptcy can remove the second mortgage and even a third mortgage off your home. In a Chapter 13 bankruptcy section 506(a) allows your second mortgage to be stripped off your home and be treated as unsecured debt. Section 506(a) can only be applied to remove a second mortgage off your home if the value of your home is at or below the outstanding balance on your first mortgage.

  • For example, if your home is worth $300,000 and there are two outstanding mortgages in the amount of $400,000 (1st mortgage) and $75,000 (2nd mortgage), then section 506(a) can be applied. In this scenario your home value of $300,000 would be below the first mortgage, which would allow you to strip off the second mortgage. In this situation, your second mortgage is completely unsecured.

During the term of your Chapter 13 plan your second mortgage will be treated as unsecured debt, and will be repaid the same percentage as the rest of your unsecured creditors.

In order to remove your second mortgage off your property you must initiate and adversary proceeding or file a lien stripping motion with the court. Most courts require that you file a lien stripping motion that will allow you to obtain a court order approving the removal of your second mortgage. Once your lien stripping motion is approved, your second mortgage will be treated as unsecured debt in your Chapter 13 bankruptcy case.

You must complete your Chapter 13 plan in order for the removal of your second mortgage to be complete. If your Chapter 13 bankruptcy case is dismissed or converted then the lien from your second mortgage will not be removed.