Combine Chapter 13 with Chapter 7 to Get More Complete Debt Relief (and Strip Liens)

Chapter 20 may clear up more debt problems than one alone

Image source - Flickr User Nina Matthews Photography

For cash-strapped consumers that are thinking bankruptcy, one of the big factors when deciding which type of bankruptcy is best is whether you're a homeowner. If you are, are you current on your mortgage payments? Do you have a second or third mortgage? If you do have a mortgage(s) over and above your primary mortgage and you don't have a ton of equity in your home, a combination of the two bankruptcy chapters may give you the best possible outcome.

Chapter 7 + Chapter 13 = Chapter 20

It's not too common, but did you know you can (depending on your income and debt) file both a Chapter 7 and a Chapter 13, just not at the same time. The order of filing is critically important and you should know that you can only get a discharge on one of these if there are just a few months (or even a couple of years) between filings. The use of these two bankruptcy chapters together is known as a Chapter 20 because 13 plus 7 is 20 - get it?

The Benefits of Filing for Both Bankruptcy Chapters

A Chapter 7 wipes out unsecured debts like credit card bills, medical bills, certain back tax debts and other unsecured debts. If you're current on your mortgage (or nearly so) and not facing imminent threat of foreclosure, but have a pile of credit cards bills and other unsecured debts, filing Chapter 7 will wipe out a big pile of the debts you can't afford to pay.

Your mortgage will survive the bankruptcy, and your car loan (if you have one) should as well, so long as you don't miss any payments. Within just a few months, you can have a discharge in hand and much more disposable income without so many debts on your docket. Once your Chapter 7 is settled, filing a Chapter 13 will give you time to catch up on any debts you're behind on that survived the Chapter 7.

If you're behind a few months on your mortgage, have student loans and owe back taxes that weren't discharged, you'll get a repayment plan that will give you three to five years to pay back these bills. But the real benefit of a Chapter 20 comes with the possibility for lien stripping and interest cram down.

Interest Cramdown and Lien Stripping

Interest cramdown is a possibility on your car loan so long as you took out the loan a few years before you filed Chapter 13. This allows you to reduce the interest rate on your loan (assuming you're paying a high rate) and also to reduce the principal. If you owe more on your vehicle than it's worth, you may be able to get the loan balance reduced to the fair market value. This can be huge.

Lien stripping applies to mortgages, but not primary mortgages. If you have a second or third mortgage or a home equity line of credit (HELOC), you may be able to get some relief there as well. If there is not enough equity in your home to cover your primary mortgage, you're upside down and any additional mortgages or a HELOC will be considered an unsecured debt in the Chapter 13 and eligible to be stripped off (removed). If there is enough equity to cover your primary mortgage and some of a second mortgage or HELOC, the debt that exceeds the equity may be able to be stripped off.

Appeals Court Has Given This Move a Thumbs Up

The Fourth Circuit Court of Appeals, which just happens to cover us here in North Carolina, has ruled that even though a debtor has enjoyed the benefits of a Chapter 7, that doesn't mean they can't also reap the benefits of a Chapter 13, so long as they don't appear to be abusing the bankruptcy system. The court's decision In re Davis shut down creditors that were trying to block lien stripping for a debtor that got a Chapter 7 discharge then applied for a Chapter 13. This is great news for NC consumers!

If you live in North Carolina and are struggling financially, contact the law offices of John T Orcutt for a free consultation today. Get the financial fresh start you deserve now.