1. Chapter 13 Lets you Keep Your Property.
Suppose, for whatever reason, you fell behind on you car or house payment. It has been more than a few months since you have been able to make a payment.
Usually, after 90 days of not receiving payments, your mortgage company or auto/truck finance company will stop accepting payments from you. Even if you are now able to resume paying the loan, and sent them a check, they would send it back to you, without being cashed. They now have "accelerated" the loan. The whole loan is due.
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Filing a chapter 7 bankruptcy would eliminate all personal liability on that debt, but, you would have to return your vehicle.
Suppose, however, you wanted to retain your vehicle. What is the answer? You would file chapter 13 instead of chapter 7. When you do that, you are telling the court, the trustee and your creditors, including the finance company, that you are going to keep your car.
With the help of your bankruptcy attorney, you would craft and propose a chapter 13 plan. In your plan, you would indicate how much you could afford to pay each month to the trustee, usually for 36 or 60 months.
Of course, you would have to show that you can afford to pay the trustee as well as make your regular monthly car payments again. If you can do that, you would be able to save your auto.
It works the same way for mortgage arrears. It is a great benefit, and a common reason, to file chapter 13 bankruptcy.
2. Chapter 13 Allows You to Modify the Rights of Your Creditors.
As long as a debt is not secured only by your principal place of residence, you have the right in chapter 13 to modify the rights of secured creditors.
Let's take the vehicle example again. That's the one that comes up most. Suppose you had a 2008 car/truck/motorcycle with a balance due of $15,000.
Now find the retail value of your car. Retail value is the amount you would have to pay a dealer today to buy that exact same car - same year, same make and same model, etc. One of the best sites for that is www.kbb.com. You find out it would cost only $9,000 to buy your car today.
In that situation, you indicate in your plan that you are going to pay back $9,000 (today's retail value) instead of $15,000 and the finance company must accept the lower number. Pretty good, right?
That's not all you can do. You can also lower the interest rate. That's right. Instead of whatever interest you had, you can modify that to 1 or 2 percent over the prime rate at the time you are filing your case. That can be a tremendous saving.
There is one caveat with modifying the rights of creditors with vehicle loans. You must have owned the car or truck for at least 910 days, which is two and one-half years. If not, you can't "cram down" the amount owed, but you can still lower your interest rate.
3. Chapter 13 Can Get Rid of a Second Mortgage or Home Equity Loan.
Here is the scenario: If you own a house where the first mortgage is "upside down" (that is, where you owe more on the house than you could sell it for), you can avoid the lien on any other mortgage on your house.
Since the credit crash of 2008, millions of homeowners are in that exact same situation. Their house is not worth what they owe on their first mortgage. Filing chapter 13 bankruptcy allows them to avoid the lien on the second and home equity loans, changing the character of the loan to the equivalent of a credit card debt - debt that is totally unsecured. Awesome!
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