There are multiple reasons why someone might pursue a Chapter 13 bankruptcy instead of a Chapter 7 filing. Their income may be too high to qualify for Chapter 7 proceedings. They may have enough personal assets that they worry about the possible liquidation of some of their property in a Chapter 7 case, or they may have secured lines of credit, like mortgages, that they hope to modify before their bankruptcy case is resolved.
Chapter 13 bankruptcy requires a multi-year repayment plan before the courts will discharge the remaining balance on someone’s eligible debts. A filer may also seek to favorably modify their secured financial obligations like car loans and mortgages during this repayment period. The following are some of the changes that filers may seek when renegotiating the terms of secured loans during Chapter 13 bankruptcy.
Adjustments to the repayment period
For those who financed a home purchase with an adjustable rate mortgage or who experienced a sharp decline in income after buying a home, making the current monthly payments on a property could be very difficult. Extending how long someone will make payments by increasing the repayment period can potentially make it easier for someone to balance their household budget by lowering the monthly payments.
Plans for missed payments
Someone who has fallen behind on their mortgage or car loan might be at risk of foreclosure or repossession. It may be very difficult for them to actually catch up on what they owe. Often, lenders want people to make all of the missed payments as soon as possible. Instead of forcing someone to pay those missed amounts all at once, it may be possible to negotiate to move them to the end of the loan.
New interest rate terms
The interest rates available for borrowers constantly change based on different economic and personal factors. Depending on when someone secured their loan and the current interest rate available when they file for bankruptcy, loan modification might include securing a slightly lower rate. It might also involve altering a mortgage to make it a fixed-rate instrument instead of an adjustable-rate mortgage that will fluctuate with the market.
Any of these modifications may make it easier for someone to keep their mortgage or other loans in good standing after bankruptcy. As a result, considering Chapter 13 proceedings to make one’s current obligations more manageable can be entirely appropriate for certain filers.