Chapter 13 Bankruptcy: The Swiss Army Knife of Financial Tools

In these days of financial meltdowns and trillion dollar bail-outs Bankruptcy has become a valuable financial tool for consumers and businesses facing diverse financial problems.

My law practice concentrates in solving financial problems and educating clients on the many ways a Chapter 13 Bankruptcy can be used to solve their financial problems.

The Chapter 13 Bankruptcy can solve so many of these common financial problems that we call it the Swiss Army Knife of financial tools.

Summary of uses for a Chapter 13 Bankruptcy

  • Forces creditors to accept past due mortgage or vehicle payments
  • Forces mortgage lenders to allow a borrower to catch up on past due payments over time
  • Forces creditors who issue credit cards to accept payments without interest
  • Forces creditors who issue credit cards to accept payments for less that what is owed
  • Forces the IRS to accept payments on past due taxes without the interest or penalties
  • Forces second mortgage lenders to accept a loan modification

Here is a more comprehensive explanation of the benefits of Chapter 13 Bankruptcy:

Consumers who are past due on their home or vehicle payments.

Consumers who have run into financial problems and who now find themselves behind on their mortgages or vehicles will often call their lender and ask to make up the back payments (arrearages). Most often the bank will not even accept any mortgage payments until the arrearages are paid in full. Most often the lenders will not accept a payment plan… it is all or nothing … pay the arrearages in full, or we foreclose and take your home (or car).

A Chapter 13 Bankruptcy can help. If a homeowner is behind on their mortgage the U.S. Bankruptcy code allows the homeowner to pay off their mortgage arrearages over time. The Chapter 13 can force the mortgage lender to start accepting the homeowner’s regular mortgage payments. What’s more a homeowner who is $24,000 behind on their mortgage, through a Chapter 13, can force the mortgage lender to accept sixty payments of $400 a month to bring the mortgage current.

Consumers who have accumulated too much credit card debt.

Often consumers accumulate very large balances on their credit cards. Sometimes it is irresponsible consumers living beyond their means and unwilling to discipline their spending. However, most of the time consumers have had a financial setback (layoff, pay cut, downsized out of a job, a protracted illness) then use their credit cards to pay everyday living expenses trying to stay afloat.

It is not unusual for individuals to come to us owing $125,000 to $300,000 to credit card companies. The problem is the high credit card interest assures that the consumer will never get their debt paid off. With $100,000 in credit card balances at an 18% interest rate (interest on credit cards can be much higher) the consumer pays $1,500 a month in interest. This means that unless the consumer makes payments substantially greater that 1,500 a month the balance on these credit cards keeps on increasing.

A Chapter 13 Bankruptcy can help. The day the Chapter 13 Bankruptcy is filed, a snapshot of your total credit card debt is taken. From that point forward the Bankruptcy code prohibits the credit card companies from charging any more interest. With a Chapter 13 Bankruptcy a consumer can pay off their credit card debt without the burden of the interest.

Even better, the Chapter 13 may allow the consumer (based on their current income) to pay back only a small percentage of the total credit card debt.

IRS problems caused by past due taxes.

For various reasons people will get behind on their taxes. When this happens the IRS will assesses both interest and penalties. In fact if a taxpayer fails to file their tax return and pay the tax, the IRS will tack on interest and penalties amounting to 5% per month for the first five months.

Even worse, after the first five months with a cumulative penalty of 25%, the IRS continues to charge interest on the outstanding tax balance ranging between 6% and 8%. It is not unusual for a taxpayer’s bill to double within eighteen to twenty-four months from the date of their failure to file.

A Chapter 13 Bankruptcy can help. At the filing of a Chapter 13 Bankruptcy a snapshot of the total tax bill is taken. This amount is frozen and the Chapter 13 Bankruptcy allows the consumer to pay these taxes with no further interest or penalties. This can save the consumer $500 to $1,000 per month in interest charges.

When it comes to taxes the taxpayer must pay the IRS in full. However, in a Chapter 13 Bankruptcy the taxpayer can choose to pay the IRS over a 36 month or 60 month period… and the best part, no interest.

My law firm sees clients that otherwise have no financial problems except a huge debt with the IRS. In these cases the taxpayer will often choose to file a Chapter 13 Bankruptcy as a cheaper alternative to a traditional IRS installment plan.

Modify your second mortgage.

Today many consumers are struggling to pay their monthly mortgage. In an effort to help borrowers avoid foreclosure mortgage, lenders sometimes allow borrowers modify their mortgage. A mortgage modification is where the mortgage lender will redo a loan on terms more favorable to the borrower. Unfortunately, most borrowers do not qualify for the loan modifications offered by their lenders.

A Chapter 13 Bankruptcy can help. A Chapter 13 Bankruptcy will allow a borrower to modify a unsecured second mortgage. If a second mortgage is 100% unsecured, meaning there is no equity in the home supporting the second mortgage, it can be modified in a Chapter 13 Bankruptcy.

If a debtor filing a Chapter 13 Bankruptcy is paying back their unsecured creditors (basically credit cards) at a rate of 20 cents on the dollar, the Bankruptcy Code allows the debtor to modify a wholly unsecured second mortgage and pay the second mortgage at the same rate being paid to the unsecured creditors, in this example 20 cents on the dollar.

Consult a qualified Bankruptcy attorney to determine if your second mortgage can be modified in a Chapter 13 Bankruptcy.

Chapter 13 Bankruptcy solves multiple problems for Chicago client.

A client came to our Thinking Outside the Box office with the following problems:

  1. Client owed the IRS $9,000 in unpaid taxes and the IRS was on the verge of taking the unpaid taxes out of her paycheck (called a tax levy).
  2. Client was three months behind on her mortgage payments and her mortgage company refused to let her make payments until she made the unpaid payments. To make matters worse the mortgage company was starting the foreclosure process.
  3. Client had around $96,000 in credit card debt. She could not make the minimum payment amounting of around $1,900/month. Further, some of the credit cards had been referred to collection agencies, some of the credit cards had been referred to law firms who threatened lawsuits seeking judgments for the past due credit cards.

Thinking Outside the Box, Inc. designed a Chapter 13 plan to allow the client to address all of her financial problems.

First, we designed the plan to pay off the unpaid taxes in full (required by law). However, by including the taxes in the Chapter 13 plan the client was able to pay off the taxes over a five-year period. Even better the Chapter13 prohibited the IRS from charging interest on the unpaid taxes saving the client $540.00 per month in interest. This filing of the Chapter 13 plan also stopped the IRS levy on our client’s weekly paycheck.

Second, our office designed the chapter 13 plan to allow the client to make her unpaid mortgage payments over a five-year period. The filing out of the Chapter 13 plan also forced the mortgage company to accept the normal monthly mortgage payments and stopped the foreclosure process.

Third, our office designed a Chapter 13 plan that let her address the $96,000 in credit card debt. We crafted a plan that allowed our client to payoff the credit card debt with no further interest payments or late fees. This saved the client about $1,400 per month in interest and fees. We further were able to structure the Chapter 13 plan allowing the client to payoff the entire $96,000 credit card balances with payment totaling only $10,600.

That is why Thinking Outside the Box, Inc. calls a Chapter 13 Bankruptcy plan the Swiss Army Knife of financial tools. In one Chapter 13 plan Thinking Outside the Box, Inc. was able to set up a plan to pay off her entire debt to the IRS without interest. Bring her mortgage payments current and stop foreclosure. Pay off the clients credit card balances with without interest and for pennies on the dollar, allowing the client to be free from all her credit card debt in five years.