Chapter 13 – Debt consolidation

Debt consolidation (Individual reorganization

Repayment plan over a 3-5 year period – The theory behind a Chapter 13 is that you are going to pay some of what you owe over a period of time 3 to 5 years depending on what you qualify for. Some of the benefits of Chapter 13 are:

  • Save your home with a cure and maintain provision – If you are behind on your mortgage due to a temporary setback and you now can afford to pay your mortgage payment, however you cannot afford to cure the arrears in a lump sum then you can file a Chapter 13 and pay the arrears through the Chapter 13 plan over a period of at most 60 months.
  • Lower interest rates on cars – The interest rate for secured creditors that are paid in full through the Chapter 13 plan is prime plus 1-3 %. The prime interest rate is currently 3.5% if you add 1-3% points that gives you a range of 4.5-6.5% interest rate paid over at most 5 years. If the interest rate on your vehicle is more than 5% you should consider filing a Chapter 13 bankruptcy to take advantage of the lower bankruptcy rate of interest.
  • Remove liens from property. If the value of the collateral is less than the amount of money owed on the collateral there are certain situations where the amount you owe can be reduced or “crammed down” to the value of the collateral. There are also ways to remove second mortgages from houses if the value does not cover the lien. This requires a valuation of the home (usually an appraisal) and must be done by motion within the bankruptcy. Once the bankruptcy is over the lien can be removed from the collateral and the debt discharged.