Today's tough economic times have resulted in falling home values, leaving many people owing more on their home then it is worth (also called being "underwater" ). If you have a second mortgage, home equity line or third mortgage on your home ("junior liens"), those loans may be stripped off or crammed down in a Chapter 13 bankruptcy. In order to strip off a second mortgage or home equity line of credit ("HELOC"), the value of your house must be less than what you owe on the primary, or first, mortgage. If this is the case, under a Chapter 13 bankruptcy you will be able to wipe out the second mortgage or HELOC and use the 3 to 5 year repayment period to pay your primary mortgage and any arrears on the primary mortgage. Lien stripping is not available under Chapter 7 bankruptcy.
Cure Mortgage Arrears, Back Taxes or Child Support
Chapter 13 bankruptcy is often the best choice for personal bankruptcy when a person or married couple owes money on their mortgage, back taxes or domestic support order and needs time to get current on those debts. Since primary mortgage arrears, back taxes and child support obligations are not wiped out by any bankruptcy, Chapter 13 can give you a chance to get caught up on those payments.
Sometimes a person qualifies for a Chapter 7 bankruptcy, but has a significant amount of non-exempt assets, such as a house with more than $60,000 worth of equity (for Colorado residents, each state's homestead exemption amount differs), large amounts of jewelry, luxury automobiles or motorcycles, a boat, that they would not be able to keep under a Chapter 7. In these cases, Chapter 13 is a better option because you can keep those assets under a Chapter 13 bankruptcy.
Divorce Settlement Obligations
While child support obligations and alimony cannot be wiped out by any bankruptcy, other divorce settlement obligations not related to support, such as property division orders, can be discharged in a Chapter 13 bankruptcy. The distinction between support orders and property settlement is important and competent legal advice is necessary to determine if a divorce obligation fits this exception.