Secured Debts in a Chapter 13 Bankruptcy
May 26, 2020
Falling behind on your home or vehicle loan due to loss of income is more common than you think. Even once you return to work, it is hard to catch up on the loan in time to stop a foreclosure or repossession. A Chapter 13 Bankruptcy stops foreclosure, repossessions and can help with credit card and medical debt at the same time. If you have fallen behind on a secured debt that you want to keep, a Chapter 13 Bankruptcy can help you repay what you are behind over a 3 to 5-year repayment plan. Here are some commons ways a Chapter 13 Bankruptcy can help with your secured debts, such as mortgages, vehicles, and recreational loans.
HOW A CHAPTER 13 BANKRUPTCY CAN HELP WITH YOUR MORTGAGE
It can stop a Foreclosure. A Chapter 13 Bankruptcy can stop foreclosure in its tracks with the protection of the automatic stay. The amount of money you are behind on your home can be paid back over the 3 to 5-year period of your bankruptcy instead of needing to come up with all the money right away. To learn more about how a Chapter 13 Bankruptcy stops foreclosure check out our blog, “How Chapter 13 Bankruptcy Stops Foreclosure”.
It can strip your second mortgage. If the value of your home is less than what you owe on your first mortgage, a Chapter 13 Bankruptcy could get rid of your second mortgage completely. Since there is no equity in your home securing the second mortgage, we can strip that mortgage and turn it into unsecured debt. That means it will be treated like credit card and medical debt and will be wiped out after your Chapter 13 Plan is complete.
HOW A CHAPTER 13 BANKRUPTCY CAN HELP WITH YOUR VEHICLE LOAN
It can stop repossession. A Chapter 13 Bankruptcy can stop your vehicle from being repossessed. In some cases, you can even get your vehicle back after it has been repossessed if you act quickly enough. However, we recommend filing before the repossession takes place. The amount you are behind, and the balance of your vehicle loan will be paid in the Chapter 13 Plan. If you continue to make your Chapter 13 Plan payments, your vehicle cannot be repossessed.
It can reduce your interest rate. If you are not behind on your vehicle loan a Chapter 13 Bankruptcy can still be beneficial if you have a high interest rate. The interest rate for a vehicle loan in a Chapter 13 Bankruptcy can be as low as 1.5% above the prime rate. As of May 2020, the current interest rate in a Chapter 13 Bankruptcy is 6.75%. If you have a high interest car loan, a reduction of your interest rate could save you a lot of money.
It can reduce the amount you owe. If your vehicle loan was taken out 910 days before you file your Chapter 13 Bankruptcy, you can reduce the amount of your loan to the value of your vehicle. This is called a “cram down”. For example, if you took out a car loan over two and a half years ago for $20,000 and the value of your vehicle is now only $15,000, you will only be paying $15,000 for your vehicle. The remaining amount owed on your loan will be treated like credit card and medical debt and will be wiped out after your Chapter 13 Plan is complete.
HOW A CHAPTER 13 BANKRUPTCY CAN HELP WITH RECREATIONAL LOANS
It can stop repossession. Just like a car loan, your motorcycle, camper, or boat loan will be paid through the Chapter 13 plan and the creditor cannot repossess it as long as you finish your Chapter 13 payment plan.
It can reduce your interest rate. Interest rates on secured debts are usually paid in a chapter 13 at 1.5 percent above prime rate.
It can reduce the amount you owe. Like a car loan, you can cram down the camper or boat loan and only pay the current value of the camper or boat. With these loans, the loan must have been taken out over 1 year before your bankruptcy is filed.
Word of Caution With “Toy” Loans!! The court is not usually a fan of people asking to not pay all their debts in a chapter 13, but still want to keep a camper or boat loan. The court feels that these loans are for nonessential items. You do not need a camper, unless you live in it, so the court feels you should not be able to use your income to pay that while not paying your other debts. In the Eastern District of Wisconsin, the trustees and the court will usually approve such a loan being in your case only if you match the amount being paid on the toy to general unsecured debts. For example, if you want to pay $5,000 to a boat loan in your chapter 13, then you need to pay another $5,000 towards your credit card and medical debts as well. Many times, that means you are paying way more than the toy is worth. This is a tricky issue and should be discussed with your attorney.
Are you trying to figure out if a Chapter 13 Bankruptcy is right for you? Pedersen Law Office, LLC offers free consults and will meet with you personally to discuss your specific circumstances and see what options are available for you. Our law office serves the communities of Appleton, Neenah, Menasha, Oshkosh, Green Bay and their surrounding areas.