How Are Mortgages or Auto Loans Handled in a Chapter 13 Bankruptcy?

 Posted on August 17, 2022 in Bankruptcy

Debts can cause a great deal of stress and financial difficulty for a family, but bankruptcy can offer a way out of these situations. However, anyone who is considering bankruptcy may wonder how different types of debts will be handled and whether filing for bankruptcy could result in the loss of his or her property. The elimination of secured debts, such as a home mortgage or auto loan, will typically lead the lender to pursue foreclosure or repossess the collateral used to secure the debts. To avoid this, a debtor may need to determine how they will be able to become current on his or her payments while eliminating other debts.

For debtors with secured debts, Chapter 13 bankruptcy is often the preferred option. This type of bankruptcy will require a person to make ongoing payments toward a repayment plan for several years, and if he or she can continue making payments toward secured debts, he or she will be able to retain ownership of his or her property. Missed payments, late fees, and other amounts owed to a lender may be included in a repayment plan, which will allow a person to become current on these loans. Chapter 13 offers some other benefits as well that may reduce the amount of a person’s debts and help him or her maintain financial stability in the future.

Cramdowns and Lien Stripping in Chapter 13 Cases

For loans other than home mortgages, the amount a debtor will be required to pay to a creditor may be reduced based on the actual value of the collateral. This is known as a “cramdown,” and it is an option that is typically used to reduce the amount of principal owed on an auto loan. If the vehicle has decreased in value over the term of the loan, and the amount owed is more than the vehicle is actually worth, Chapter 13 bankruptcy may allow the principal of the loan to be reduced to reflect the vehicle’s current value. 

While cramdowns are not available for home mortgages, debtors may be able to address second mortgages or other junior loans in situations where the mortgage is “underwater,” meaning that the debtor owes more on his or her first mortgage than the home is worth. In these situations, a second mortgage or home equity line of credit may be reclassified as an unsecured debt, and these liens may be “stripped off,” eliminating creditors’ claims against the property. These loans will be discharged once the Chapter 13 bankruptcy process is complete.

Contact Our Kane County Chapter 13 Bankruptcy Attorney

There are a variety of complex financial factors that may need to be considered during the bankruptcy process. With the help of an attorney, debtors can make sure they take the correct steps to address different types of debts, reduce the amounts they owe, and put themselves in a better financial position. To learn how Thomas Law Office can help you resolve debt-related issues, contact our McHenry County Chapter 13 bankruptcy lawyer at 847-426-7990.

Sources:

https://www.investopedia.com/terms/c/cramdown.asp

https://www.law.cornell.edu/uscode/text/11/506

https://www.law.cornell.edu/uscode/text/11/506