Chapter 7 Bankruptcy in Massachusetts
The main advantages to filing under Chapter 7 instead of under Chapter 13 is that the debtor receives a discharge within four or five months after filing and does not make any payments to the bankruptcy trustee. However, if the debtor’s main goal for filing a bankruptcy is to avoid losing a home to foreclosure, the debtor will have to make up the missed payments within a matter of months of filing (as opposed to over 36 to 60 months in a Chapter 13 bankruptcy).
The benefits of Chapter 7 bankruptcy are:
• It provides immediate protection from your creditors. Once you file, an automatic stay goes into place which prevents creditors from making phone calls, suing you, attaching your wages, sending you correspondence, or taking any other steps to collect from you.
• It can remove judicial liens on your property through a simple process. Judicial liens are liens that arise from lawsuit. Common examples are executions and attachments.
• It discharges you from credit card debts, most contract debts, income tax debts that meet certain requirements, and your personal liability on mortgages and car loans. Some debts are not dischargeable, such as student loans, alimony, and child support, and certain types of taxes.
If you believe that bankruptcy may be beneficial to you, please contact me to set up an appointment so that we can discuss your options.
Chapter 13 Bankruptcy
Unlike Chapter 7, a Chapter 13 bankruptcy is where the debtor makes payments under a Chapter 13 plan over 36 or 60 months. In a chapter 13, a debtor is not require to pay off all of his or her debts. There are a class of debts that must be paid. The common types are recent taxes, alimony or child support that is past due, mortgage and car loan arrears. The Chapter 13 plan directs most of the debtor’s disposable income to these debts, leaving only a fraction for credit cards. Provided that the debtor makes all of the payments during the term of the plan, the remaining balance of the credit card debts (and other dischargeable unsecured debts) are discharged at the end of the term even though they are not paid in full. As a result, the debtor will be current with non-dischargeable priority debts (e.g. taxes, child support) and secured debts (mortgage and car loans), and gets a clean slate from credit cards and other unsecured debts.
Here are some typical reasons for filing a Chapter 13 bankruptcy instead of a Chapter 7:
Avoiding foreclosure and getting caught up on the mortgage – the “cure and maintain” option
A homeowner can stop foreclosure in Massachusetts by catching up on missed mortgage payments during the Chapter 13 plan (known as “curing arrears”.) For example, if a homeowner owes $15,000 in missed mortgage payments, they could file a Chapter 13 plan that would allow them to spread this $15,000 over 36 months ($416 monthly) if manageable and their income is below a certain limit, or 60 months ($250 monthly).
Stripping a second mortgage
If a homeowner has a second mortgage, the second mortgage can be stripped off in a Chapter 13 plan if the loan is wholly unsecured. A second mortgage is wholly unsecured if the balance of the first mortgage is more than the value of the home. For example, let’s consider a home that has an appraised value of $200,000 and a first mortgage loan with a balance of $205,000. If the homeowner also has a second mortgage, it would be wholly unsecured because if the house was sold today, the first mortgage loan would not get completely paid off, and the second mortgage loan would not get anything. This second loan can be stripped off, which means if the debtor completes the Chapter 13 plan, the second mortgage is discharged and is no longer a lien on the property. This can be a substantial monthly savings and create equity in the property.
Paying back income taxes in a manageable amount
Much like mortgage arrears, non-dischargeable tax debts (generally 3 years or younger) can be spread out over 36 to 60 months. The IRS and Massachusetts Department of Revenue (DOR) will offer you a monthly payment plan, but for some people the amount may not be feasible. As long as the balance will be paid by the end of the plan, a Chapter 13 plan could put a tax payer in a lower monthly amount that is feasible. Additionally, it may be able to lower your monthly payment by discharging older taxes. That is, a payment plan with the IRS or DOR requires you to pay back all taxes that are owed, whereas a Chapter 13 plan only require that the non-dischargeable taxes be paid back in full.
High debts but non-exempt property
The other advantage of Chapter 13 is for people who have an asset that cannot be exempted due to its high value, such as an antique car or investment property. In a chapter 7 bankruptcy, the trustee could sell this asset and pay the proceeds to the creditors. However, in a chapter 13, this asset could be saved if the plan paid enough to a class of creditors known as the general unsecured creditors.
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