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Chapter 13 Bankruptcy

A Chapter 13 is a reorganization or restructuring of your debt. The basic concept of a Chapter 13 is that you will repay some of your debt through a re-payment plan. The amount of debt you repay will depend on the type of debt and your income.

In a Chapter 13, a plan will be set up for the repayment of a portion of your debt. The Chapter 13 Plan will generally last between 36 months and 60 months. 60 months being the maximum. Depending on your income and circumstances, the amount of your monthly payment may be very low. One very important aspect of a Chapter 13 is that your unsecured creditors (such as credit cards, collection accounts or personal loans) do not have to be paid in full. Once your Chapter 13 Plan is approved, all you need to do is make the monthly payments for the term of the Plan. At the end of the Chapter 13 Plan after all of the Plan payments have been made, the balance of the debt which was not paid off is discharged and you will no longer be obligated to the creditors listed in your petition.

In the recent housing and foreclosure crisis, many Americans are struggling to save their homes. Faced with Notices of Default and Notices of Sale, homeowners usually have 2 options. One is to plead with the Bank and hope that they work out a solution to save their homes and the other is to file Bankruptcy. When you file for a Chapter 13 Bankruptcy, the amount that you are behind on your mortgage can be paid back in 36 to 60 months in a Chapter 13 Plan. For example, if you are $15,000 behind in paying your mortgage and are facing foreclosure, you could repay the $15,000 through the Chapter 13 Plan at the market interest rate of approximately $309 a month (which includes 11% for the trustee). Thus, you could effectively be brought current on your mortgage payments and avoid foreclosure.

Another most powerful tool available in a Chapter 13 is the ability to eliminate a second mortgage. This is called a Lien Strip. Under certain circumstances, a second mortgage can be “stripped” off of your home and converted into unsecured debt. Once the second mortgage is stripped and included in the Chapter 13 Plan as unsecured debt, all you have to do is make all of your monthly payments according to the Chapter 13 Plan. As long as you make all the Chapter 13 Plan Payments, your unsecured debts, which also includes your second mortgage, are completely eliminated.