What does the completion of a successful 3-to-5-year Chapter 13 case look like? What happens to your assets and debts?
The Sample Chapter 13 Case
In our last blog post we wrote about completing a Chapter 13 “adjustment of debts” case. We focused on the benefits you get at the tail end of your case, and on the case’s final events.
But like so many other bankruptcy procedures, Chapter 13 completion makes much more sense when tied to tangible facts.
So imagine a Chapter 13 case filed to catch up on a home mortgage, “strip” a second mortgage, catch up on some property taxes, and deal with some IRS income taxes.
Henry and Heather had been $7,500 behind on their first mortgage and so at risk of foreclosure. The situation was worsened because they were also $3,000 behind on their home’s property taxes. They hadn’t paid on a $30,000 second mortgage in months, so that mortgage holder was also threatening foreclosure.
On top of this they owed $10,000 in income taxes from several years ago when they had to close down a business. That business had started their downward financial spiral. They also owed $5,000 for last year’s income taxes, plus $90,000 in a combination of medical and credit card debts.
Their Chapter 13 Plan
Three years ago Hannah and Henry’s bankruptcy lawyer had recommended they file a Chapter 13 case. Their Chapter 13 payment plan enabled them to do the following:
- Catch up on the $7,500 in late mortgage payments over the course of those 3 years.
- Catch up on their $3,000 in property taxes over the same period.
- Keep current on their ongoing mortgage and property taxes by budgeting for these obligations.
- Prevent either their mortgage lender or the county tax collector from foreclosing or taking any other action to collect.
- “Strip” their second mortgage from their home by establishing that all of its equity was exhausted by the first mortgage.
- As a result they could stop paying the second mortgage and did not have to catch up on the arrearage. The entire $30,000 balance was treated as an ordinary unsecured debt.
- Treat the older $10,000 in income taxes as an ordinary unsecured debt.
- Pay newer $5,000 income tax debt as a “priority” debt, but without any further interest or penalties. Prevent the IRS from taking any collection action while paying it as their budget allowed.
- Pay only 2 cents on the dollar on all $130,000 in their remaining unsecured debts: the $30,000 second mortgage, the $10,000 in older income tax, and $90,000 in medical/credit card debts. They could pay only $2,600 on this $130,000 because that is all that was available in their budget during their 3-year payment plan after paying the debts above.
The Completion of the Case
Now after 3 years Henry and Hannah have finished paying enough into their Chapter 13 plan to accomplish the above. Their Chapter 13 trustee so informs them, their lawyer, and the bankruptcy court. Then the following happens:
- The bankruptcy judge signs a discharge order. That discharges—legally writes off—the unpaid 98%—$127,400—of the $130,000 of ordinary unsecured debt. That debt is gone.
- Hannah and Henry are now current on their first mortgage and property taxes.
- Their “stripped” second mortgage is completely off their home’s title. This puts them that much closer to building equity again in their home.
- They are current on income taxes, having discharged most of the older taxes and paid off the more recent $5,000.
- The court closes their Chapter 13 case.
- Henry and Hannah are completely debt-free except for their caught-up mortgage.