Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What is Chapter 13 bankruptcy?”
Since the downturn in the housing market in recent years, there is an interesting trend that shows increasing numbers of people choosing to surrender their homes during Chapter 13 bankruptcy when they are not required to do so. Like the depressed housing market, this trend does not show signs of going anywhere but is definitely outside traditional bankruptcy norms. However, for people considering bankruptcy in North Carolina and the few other “non-recourse” mortgage states, surrendering your primary home in bankruptcy can discharge you of the entire mortgage amount regardless of how much it goes for at foreclosure.
If they qualify for a Chapter 7, yes.
However, unlike Chapter 7 bankruptcy, Chapter 13 allows you to make up missed payments on your mortgage, car loan, student loan or other debt that would go unaffected by a Chapter 7 filing.
In addition, Chapter 13 gives you the option of keeping all of your property and paying these missed payments out of your income. Chapter 7, in contrast, only allows a person to keep exempt property such as home equity and their automobile while it sells off the rest to cover your debts.
For these reasons, historically many people chose Chapter 13 bankruptcy if they wanted to prevent foreclosure on their home. However, with the drastic decline in housing values in the past decade, many people who do not qualify for Chapter 7 are choosing to surrender their homes in Chapter 13 instead.
In addition, many consumers do not meet the requirements for Chapter 7 because they:
- Make too much money, or
- Filed a Chapter 7 within the past 8 years
Even if a person qualifies for Chapter 7 bankruptcy, Chapter 13 could be more appropriate depending on the person’s overall financial situation. This can occur when a debtor:
- Has non-exempt property that they do not want to be liquidated in a Chapter 7
- Generally speaking, exempt property is comprised of the necessities of modern life such as a motor vehicle (up to a certain value) and reasonably necessary clothing and household goods. Non-exempt property is things that are not necessary such as family heirlooms, cash, stocks and bonds, and second cars or homes.
- Has substantial priority debt that would not be dischargeable in Chapter 7 that they need an opportunity to pay
- Priority debts are unsecured debts (car loans or any other debts obtained by putting some other property up as collateral, or security) that Congress has deemed are more important than others. Chapter 13 offers better tools to deal with priority debts than Chapter 7 does.
- The federal Bankruptcy Code sets out a specific ranking of the 10 priority debts in the order in which they must be paid. The priority debts include (in incomplete descending order) domestic support, administrative expenses for the bankruptcy case itself, claims from an involuntary bankruptcy petition under either Chapter 7 or 13, and taxes accumulated before the bankruptcy filing.
- Chapter 13 allows priority debts to be paid via payment plan. Because they will be paid back gradually, priority debts under Chapter 13 must be paid in full, unless:
- A priority debtor agrees otherwise, or
- The debt is a domestic support obligation (like child support) and the debtor contributes all of his or her disposable income to a five-year payback plan. This is governed by 11 U.S.C. 1322(a).
Further, North Carolina is one of the few states that, under specific circumstances, does not allow banks to pursue additional claims against debtors for the difference between the full mortgage amount and the amount the property sold for at foreclosure. In states that allow such recourse mortgages, there is an increasing trend for banks to bid for only a portion of the home’s already decreased value at foreclosure and then come after the debtor for the difference between the full mortgage amount and the foreclosure price. If a home mortgage is one of your primary debts and an experienced bankruptcy attorney helps you ascertain that Chapter 13 bankruptcy is your best option, this might be a course of action he or she will advise you to consider.
If you are contemplating bankruptcy and are interested in surrendering your home to discharge yourself of the entire mortgage debt in North Carolina, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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