Filing for Chapter 13 bankruptcy relief can be beneficial, as it helps you reorganize your debt into a three or five-year manageable repayment plan. When you own real estate, here are three benefits you can take advantage of during your Chapter 13 bankruptcy process.
Keep Your Home's Equity and Your Home
If you are considering filing bankruptcy, your first concern may be what will happen to your home during the process. You will need a place to live once your bankruptcy is discharged, and if you own your home, it will be included in your bankruptcy with all your other debts and assets. Fortunately, when you file Chapter 13 bankruptcy in any state, your home is exempt during the bankruptcy process, so it won't be sold to pay for any of your debts.
In addition to being able to keep your home, the homestead exemption will allow you to keep a certain amount of your home's equity after a Chapter 13 bankruptcy. This amount depends on the state you live in. Some states allow you to exempt all your home's equity, and others have a set maximum amount of equity exemption. For example, if you are filing Chapter 13 bankruptcy in Nevada and you own a home, this exemption will protect up to $550,000 of your home's equity through the bankruptcy process. Being able to exempt a portion or all your home's equity can decrease the minimum amount you have to pay to your unsecured creditors and make your repayment plan more affordable.
Eliminate Liens from Your Home Loan
Another way filing Chapter 13 bankruptcy can benefit you is by eliminating any second or third mortgages, or home equity lines, from your home. This process, called lien stripping, allows you to stop paying the mortgage payments on these junior liens as soon as you file Chapter 13 bankruptcy. Then, when your bankruptcy is discharged and completed, these junior liens are converted into unsecured debt. A portion of these junior liens get included in your debt repayment plan and they are eliminated when you complete paying the plan.
Make sure your bankruptcy is discharged and not dismissed. If it is dismissed, your bankruptcy is not completed, and you will be responsible for paying on these junior liens and all other debts.
Lower Your Debt on an Investment Property
When you own an investment property, such as a rental home, filing Chapter 13 bankruptcy can help you in this situation as well. If you purchased your investment property more than one year before you filed for Chapter 13 bankruptcy relief and the property is worth less than what you owe on the mortgage, you can "cram down" your mortgage loan amount.
To cram down your loan means to reduce the amount of the loan until it equals the property's value. This can be helpful if your investment property is in an area that has recently had decreasing real estate values.
When you cram down any debt on an investment property, the mortgage amount over the value of the property gets turned into unsecured debt and a portion of it will be included in your repayment plan. The rest of the unsecured amount is wiped out and you continue to pay to your mortgage lender the rest of the mortgage remaining on the property.
The bankruptcy court can also renegotiate the interest rate with your mortgage lender, potentially lowering your interest rate and saving you money on your mortgage. The bankruptcy court usually changes the interest rate to prime rate plus a small percentage, which may be lower than what you were previously paying.
Your Chapter 13 bankruptcy filing can help you out in these three ways. Click here to discover more about filing for bankruptcy, or contact an experienced bankruptcy attorney in your area.
