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Chapter 13 cramdown

A New York chapter 13 bankruptcy is wonderful federal law. Bnakruptcy attorney use chapter 13 bankruptcy to stop a house foreclosure, make up the missed mortgage payments and keep the house. You can also pay off back taxes through your Chapter 13 plan and stop interest from accruing on your tax debt. It lets you rearrange your financial affairs, repay a portion of your debts and put yourself back on your financial feet. The most important thing about Chapter 13 is that it will allow you to keep your valuables—especially your home and car—which might otherwise be lost. You repay your debts through a Chapter 13 plan. The plan shows how you intend to repay of all or a portion of your debts.

In New York, a chapter 13 plan is created by the chapter 13 bankruptcy attorney and is submitted to the bankruptcy court and must be approved to become effective. Once the Bankruptcy Court confirms the plan, it will prohibit your creditors from collecting their claims from you during the course of the case and allow you to pay off the debts in monthly installments.

Under a typical New York chapter 13 bankruptcy plan, you make monthly payments to a person called the  New York Chapter 13 trustee, who is appointed by the New York Bankruptcy court, either Southern , Eastern or Northern District. The New York chapter 13 Trustee collects the money paid by you under the plan and disburses it to your creditors as the plan directs. Upon completion of the payments  in the chapter 13 plan, you will be discharged from liability for the remainder of your debts. The plan can last from 3 to 5 years. 

You should consider filing a Chapter 13 plan if you:

  • Own your home and are behind in your monthly mortgage payments;
  • Are behind on debt payments, but can catch up if given some time;
  • Have valuable property, which is not exempt, but you can afford to pay creditors
    from your income over time.
  • You have a 2nd Mortgage and the value of your home has dropped.

You will need to have enough income in a debt consolidation plan to pay off your basic monthly expenses, including your monthly mortgage and have enough for the monthly Plan payments.

PLEASE NOTE LIMITS ON DEBTS -  Section 109(e) of Title 11, United States Code sets forth debt limits for individuals to be eligible to file under Chapter 13 the debt limits for filing Chapter 13 of unsecured debts of less than $360,475.00 and secured debts of less than $1,081,400.00. These debt limits are subject to annual cost of living increases and represent values updated through April 1, 2010.

Lien stripping of your second mortgage.  If you have a second mortgage on your home and if the value of the property falls below the mortgage loan amount, you may be able to  reduce the balance of the 2nd mortgage loan to equal the current value of the property.  This is called lien stripping or cram down.

When a judge removes the second mortgage lien during bankruptcy proceedings it is referred to as “stripping” the lien, “ strip down" or a “cram down.”  This procedure is only available in a chapter 13 bankruptcies, not in chapter 7 bankruptcies.  An experienced bakruptcy lawyer us required to prepare the application for a cremdown.

This is an example of Lien Stripping:Chapter 13 cramdown

  • Home has a market value of $310,000.
  • The first mortgage is $160,000.
  • The second mortgage is $150,000.
  • The first bank is secured by the property value.
  • The second bank has nothing that secures their lien. They are completely unsecured because even though there is equity of $150,000, in New Jersey the homeowner/ debtor can keep the first $150,000 above the first mortgage.  In this case they are protected for a home value up to $310,000. After that the property has no value left over from the first lien and the homestead exemption to give the send mortgage holder.
  • So in a Chapter 13, you can strip the second mortgage.
  • The second lien is treated as an unsecured creditor.
  • In this case, in all probability the 2nd mortgage will receive pennies on the dollar. So if the plan proposed is a 5% plan, the 2nd mortgage holder will receive $7,5000 (5% of $150,000) over a 5 year period and then nothing more.
  • After bankruptcy discharge (completion of the plan) and the homeowners (debtors) will get to keep the house.
  • Now, THIS IS A FANTASTIC weapon for homeowners!

An example of a typical New York chapter 13 bankruptcy case: (note that this is a simplified example and not 100% accurate)

FACTS: A couple living in Queens, New York, has a monthly mortgage payment of $1,500 dollars and is in arrears for ten (10) months, totaling $15,000. They also have credit card debts totaling $50,000 and a  second mortgage of $150,000. The house has a current market value of  $310,000 and there is a first mortgage of $160,000.

THE ANALYSES: The house has equity of $150,000. ($310,000 market value - $160,000 first mortgage). New York uses a state homestead exemption of $150,000.  This means that the first $150,000 in equity is exempt and creditors cannot get any part of it. Therefore, in this example, there is no excess equity in the home ($150,000 - $150,000 = -$0) so the debtor can keep his home by paying into the chapter 13 bankruptcy plan a total of $15,000 over 5 years.  However, a small percentage must be paid to the unsecured creditors and 10% to the Trustee.

THE PLAN: The Debtors will pay the $15,000 in arrears. It will also offer to pay the unsecured credit card 5 cents on the dollar ( a 5% plan).  The total of the plan will be $25,000.  This amount includes $15000 for the first mortgage arrears, $2,500 for 5% of the  $50,000   credit card debts,  $7,500 for 5% of the    second mortgage of $150,000.   In addition there is a Trustees fee of 10%, which equals to $2,500. Therefore the plan total is $27,500. The plan we have chosen goes for 60 months, so the monthly amount of the plan is $ 458.34 per month. ($27,500 divided by 60 months)

The Debtors will pay to the Trustee the sum of $458.34 per month for 60 months. The plan therefore reduced the unsecured debts of $50,000 to $5,000 and the 2nd mortgage to $7,500. This is called a 5% plan.  We the debtors complete the plan they will have paid off the mortgage arrears and reduced the unsecured credit cards  and the second mortgage by 95%!!!

Behind in Your Mortgage? The bank served you with  foreclosure papers?  Schedule a free consultation with our bankruptcy lawyers and find our how a chapter 13 in New York  can finally make your life livable again. Take this opportunity to also find out if the Obama Home loan Modification Program (HAMP) can help you in reducing your monthly mortgage payment.

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