Chapter 13 Gives You Lots More Time to Pay Crucial Creditors

Posted by Kevin on May 10, 2017 under Bankruptcy Blog | Comments are off for this article

When you’d like to favor certain important debts over others, often Chapter 13 makes this possible. 

Using the Bankruptcy Laws to Your Advantage

One of the basic principles of bankruptcy is that you usually can’t favor one debt over your other debts. However, under the Bankruptcy Code, certain creditors are recognized to be legally different. For example, secured creditors have rights over your property that you’ve given as collateral, rights that unsecured creditors don’t have. Also, bankruptcy does not discharge (write off) certain debts. These include child support, many types of taxes and many student loans, and certain other debts. These can’t be discharged while most debts can.

Chapter 13 requires that you treat certain debts differently- and that can be to your advantage.

Here are two good examples.

Catching up on Your Mortgage Arrearage

The law highly favors residential mortgage debts, especially your primary mortgage. Why?  The policy reason is that these lenders should be protected in bankruptcy to lessen their risks. Arguably this encourages more investment in the residential mortgage capital markets which makes mortgages more readily available to homeowners.

So, if you were behind on your home mortgage and wanted to keep the home, you’d have to catch up.  That is referred to in the Chapter 13 context as paying the mortgage arrearage.   You can’t escape doing so just because the home is worth less than the debt (as you often can with a vehicle loan).

In a Chapter 13, you have up to 60 months to pay your mortgage arrearage.  In New Jersey, those payments are made to the trustee while you make your regular mortgage payments going forward directly to the lender or servicer.  As long as you make these payments, the automatic stay remains in effect and your mortgage lender cannot file a foreclosure.  Moreover, the lender cannot demand payments that exceed 1/60 of the arrearage (assuming a 5 year plan) and cannot add late or other fees.

Child Support Arrearage

Another kind of debt that is highly favored in the law is child support. As a result, if you get behind on support payments, the collection procedures that can be used against you are extremely aggressive.  In New Jersey, you can go to jail, have your driver’s license suspended or have a professional license suspended.

Chapter 7 provides no direct help if you owe back support. The “automatic stay” that protects you from other creditors does not even apply to support debt under Chapter 7. This means that the aggressive collections can just continue; the bankruptcy filing has no effect on it.

But a Chapter 13 is very different. The “automatic stay” does protect you and your property from collection of the support arrearage. You ARE protected from support collections, as long as you follow some strict rules. After the Chapter 13 filing, you must pay ongoing regular support payments, and your Chapter 13 plan payments. In addition, you have to pay off the entire support arrearage before completing the case (up to 60 months).