Lose Benefits of Chapter 13 Bankruptcy With Loan Mods

May 9, 2012 by  Filed under: Bankruptcy 

No one can predict what would happen back in late 2007 and 2008. Shortly after Congress modified the bankruptcy code to lower the amount of people filing bankruptcy by eliminating individuals they felt were abusing the system. Included in the changes to the bankruptcy code was a means test to qualify people filing bankruptcy along with a pre-bankruptcy credit counseling course and a post-bankruptcy financial management course. Initially, it seemed to be working great and the number of those filing bankruptcy declined. And while all this was going on, the credit markets were heating up with piles of bad paper. Next, the real estate bubble burst and down came the American economy. Millions of Americans were upside down on their house, buried under a mountain of credit card debt and made too much money to file for bankruptcy. That’s when bankruptcy attorneys started getting creative on how to use the true benefits of Chapter 13 bankruptcy.

After everything blew up, the government came up with loan modification plans to help Americans that were saddled with a bad mortgage. Only problem with this was, it didn’t work and only about 5% of those people that applied actually got a loan modification. Many of these folks ended up losing their homes to foreclosure because they got so far behind abiding by the new loan mod rules. Now people were upside down on their house and/or maybe lost it to foreclosure and buried under a mountain of credit card debt. After trying to do it the way they thought was right, they had no other option but to file bankruptcy. This is when the bankruptcy attorney got the call as a last resort. For the ones that did not qualify to file Chapter 7 bankruptcy, the bankruptcy attorney would offer Chapter 13 as an alternative.

What most people didn’t know is Chapter 13 bankruptcy was almost form fitted for this situation. What happened was many bankruptcy attorneys figured out that second and third trust deeds were technically no longer secured by anything and should be able to be discharged at the end of a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy the debtor and their bankruptcy attorney are required to submit a feasible repayment plan that will last 3 to 5 years to the bankruptcy court. In this plan, debts are paid by priority, with secured debts being paid first and unsecured debts getting whatever left over. The bankruptcy attorney would file a motion with the court to make the debt that was no longer secured by the property because of the devaluation an unsecured debt. Since it is unsecured it would get whatever crumbs throughout the payment plan and the remainder would be discharged at the end of the Chapter 13 bankruptcy. For the few individuals that received a loan modification there was a glitch. If the first trust deed was lowered beneath the value of the property, the second could not be discharged in the bankruptcy filing and would have to be paid in full. Even if there was a penny of value, the loan is still secured by that property. All of this can get confusing and everyone in this situation should seek the advice of a bankruptcy attorney to figure out what works best for them.

The author started DebtFreeBankruptcyAttorney.Com which is a website that helps individuals with debt problems by putting them in touch with a local bankruptcy attorney that specializes in filing bankruptcy under Chapter 7 and Chapter 13 bankruptcy. Check our website for more answers to bankruptcy questions and ideas on how to have a debt free future.

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