Power over Your Secured Debts through Chapter 13
Chapter 7 strengthens your hand with your secured debts. But Chapter 13 can be much stronger. Starting with a more potent “automatic stay.”
The last blog post explained how filing a Chapter 7 “straight bankruptcy” can:
1) temporarily or permanently stop your secured creditors from taking your property in which they have a lien;
2) prevent a creditor with an unsecured debt from turning it into a secured one;
3) help you keep the property which has a creditor’s lien; and
4) if you want, enable you to surrender the collateral to the creditor without owing anything more on the debt thereafter.
However, another legal option, the Chapter 13 “adjustment of debts,” can often give you a whole lot stronger version of these four benefits than does a Chapter 7 case. You may not always need more help. But in many situations when you do, Chapter 13 can work wonders.
Because there are so many ways that Chapter 13 helps, we’ll cover these four benefits in four blog posts, starting with the first one today.
Benefit # 1: Stopping Secured Creditors from Taking Your Property
In a Chapter 7 case the “automatic stay” stops your secured creditors from taking any action against your property in which they have a lien. This “stay” is imposed immediately as of the moment that your case is filed. This happens just as quickly under Chapter 13. (See Section 362 of the Bankruptcy Code.)
But the “automatic stay” can be tremendously stronger under Chapter 13 for three reasons. It:
1. lasts much, much longer,
2. can apply also to protect co-signer on consumer debts, and
3. provides a protected environment to allow the other Chapter 13 benefits to work.
Lasts Much, Much Longer
Chapter 7’s “automatic stay” generally lasts only about 3 or 4 months as it protects you and your property from the secured (and other) creditors. Sometimes the period of protection is even shorter. If a secured creditor is aggressive about trying to get back its collateral, that creditor may ask the bankruptcy court for “relief from stay” to start or resume chasing the collateral. Either way, Chapter 7’s “automatic stay” only pauses the action against you and the property.
In contrast, a Chapter 13 case usually lasts 3 to 5 years. The protection of the “automatic stay” over your property can last that entire time.
Just as in Chapter 7, during a Chapter 13 case a creditor can ask for “relief from stay”—permission to pursue your property. But practically speaking, whether or not a creditor asks for “relief from stay” in the first place largely depends on how you and your bankruptcy lawyer treat that creditor in your Chapter 13 payment plan. There are some relatively complicated laws about how secured debts can be treated. You can avoid problems by not giving your secured creditors legal grounds to complain.
Then once the Chapter 13 plan is approved by the court, whether a creditor complains and asks for “relief from stay” after that depends on how well you fulfill the terms of that plan as it affects that creditor.
Even if the plan is reasonable and even if you are making payments on it as approved, the creditor may still ask for “relief from stay” just to force some concessions from you. The creditor may want larger monthly payments to pay off a debt faster, or conditions to induce you to make the payments on time.
This kind of legal maneuvering can complicate the “automatic stay”protection. But it does not change the reality that under Chapter 13 your secured property is usually protected for much longer, giving you a lot more flexibility in how you handle your secured debts.
The “Co-Debtor Stay”
A Chapter 7 case does nothing to stop a creditor from pursuing a co-signer or the co-signer’s collateral. But Chapter 13 does provide this benefit. (See Section 1301.)
There are conditions and limitations to this special “stay.” But from the start the co-debtor stay immediately protects the co-signer and his or her property. That gives you a chance to get your Chapter 13 plan started and see whether and how the creditor responds.
Similar to the usual “automatic stay,” a creditor can ask for “relief from the co-debtor stay” to get court permission to go after the co-signer or his or her collateral. If the creditor does not make this request, your co-signer is protected. Indeed, only if the bankruptcy court says otherwise, your co-signer is protected.
If and when the co-signed creditor makes this request of the court, you may need to pay this creditor more to prevent it from being allowed to go after your co-signer. Under some circumstances you may be able to pay more to this creditor simply by paying less to your other creditors, while paying no more in total.
Again, it depends on the facts of your case. But the reality is that the “co-debtor stay” gives you the power to protect your co-signers immediately and potentially for the long run, where Chapter 7 would provide no help at all.
Enables the Other Chapter 13 Benefits to Work
Chapter 13 gives you many strong powers for dealing with secured creditors. Many of those only work because of the long and continuous protection provided by the “automatic stay.”
For example, unlike Chapter 7 which provides no legal mechanism for catching up on unpaid mortgage payments, Chapter 13 effectively gives you the entire length of the 3-to-5-year case to catch up. But this only works because throughout this time the mortgage holder is stopped from foreclosing by the ongoing “automatic stay.”
There are many other Chapter 13 benefits that can only be implemented with an ongoing “automatic stay” giving you the necessary protected time. Just a few examples of these other benefits are:
- the “stripping” of a second mortgage to stop the monthly payments on that mortgage and reduce the amount of debt against the home
- “cramdown” of a vehicle loan to reduce payment amounts and the total to be paid
- catching up on child or spousal support payments while collection efforts are on hold
- paying off recent unpaid income taxes without the IRS/state being able to pursue you in the meantime
- catching up on unpaid real property taxes on a home, without your mortgage holder being able to foreclose on that basis in the meantime