Chapter 13 Bankruptcy Can Help!
In today’s depressed real estate market and sinking economy, homeowners and small business owners may want to consider a chapter 13 bankruptcy. Consider this case study:
The Current Situation
Bill and Jill own their own company. Business and profits are down. Here is a snapshot of their financial situation:
Their home now has a market value of $200,000 with a first mortgage of $250,000 and a home equity line of credit of $100,000. Monthly payments are $1,880 (PITI) and $416. In order keep their business going, their credit card debt has ballooned to $75,000. Monthly payments on the credit card debt total $1500. They own two cars purchased in 2006. The cars are valued at $10,000 and $8,000, but have debts of $13,000 and $12,000 respectively. Payments on the vehicles are $413 and $240. In addition, they have equipment which is used in the business on which they have debt of $100,000 with monthly payments of $4000. They no longer need some of the equipment due to the downturn in business. The equipment is worth far less than what they owe.
Total combined monthly debt service on the all obligations equals $8,449.
After Filing Chapter 13
Here is how a Chapter 13 Bankruptcy can help:
1. Strip off the home equity line of credit. In a chapter 13 bankruptcy the homeowner can “strip off” the second mortgage IF the home is worth LESS THAN the first mortgage--which is clearly the case here. The client must complete the chapter 13 plan in order to strip off the mortgage.
2. Stop making payments on the credit card debt--which will be discharged in the bankruptcy.
3. Reduce the payments on their personal cars by lowering the debt to the current market value of the vehicles, reducing the interest rate and spreading the payment over 60 months. . Note that this is possible ONLY IF the cars were purchased more than 2 ½ years ago OR were purchased and used for business purposes.
4. Return the unneeded business equipment. Reduce the monthly payments on the equipment which they are keeping by reducing the debt to the market value of the equipment, reducing the interest rate and spreading the payments over 60 months.
The new monthly Debt Service is $3,162 computed as follows (after relinquishing some of the equipment)
1st mortgage payment $1,880
Vehicle payments $352 ($18,000 over 60 months at 6.5%)
Equipment payment $782 ($40,000 over 60 months at 6.5%)
Additional chapter 13 payment $148 (for chapter 13 trustee fees and attorney fees)
Other Considerations
Chapter 13 bankruptcy is not for everyone and requires a careful analysis by an attorney. While the fees and costs are relatively inexpensive, the clients must consider other factors, such as the hit on their credit report. Nevertheless, it can provide a significant benefit for those who are struggling in today’s economy.
The Law Office of Allen D. Butler has extensive experience in bankruptcy matters and offers a free initial consultation. For more information see our website at www.legalaz.com.
