Debt Consolidation, or Chapter 13, is that part of the Federal Bankruptcy Code under which a person may repay all or a portion of his or her debts under the supervision of the Bankruptcy Court. The most important thing about debt consolidation is that it will allow you to keep your valuables-especially your home and car-which might otherwise be lost.
In a debt consolidation case, the person who files must submit to the Court a plan for the repayment of all or a portion of his or her debts. The plan must be approved by the Court to become effective. Once the Court approves the plan, it will prohibit your creditors from collecting their claims from you during the course of the case.
You must make regular payments to a person called the Chapter 13 Trustee, who collects the money paid by you and disburses it to your creditors as called for in the plan. Upon completion of the payments called for in the plan, you will be discharged from liability for the remainder of your debts.
You should consider filing a Chapter 13 plan if you:
You will need to have enough income in a debt consolidation plan to pay off your necessities and keep up with the required payments as they come due.
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In many jurisdictions, most debtors are allowed to file a debt consolidation petition with minimal money up front. The attorney’s fee is approved by the Court, together with the other administrative costs, is paid out of the monthly plan payments which you make to the Trustee. There are some exceptions to this general rule and you should discuss your situation with an attorney. Lewis & Jurnovoy Bankruptcy Lawyers can explore your particular situation with you.
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When you get behind on your house payments, your creditor, perhaps a mortgage company, savings and loan bank, credit union or even an individual, may foreclose on your property. The number of months you are behind may vary, but at some point in time the creditor may refuse monthly payments unless you pay all of the arrearage. If you cannot, the entire amount owed on the note may be accelerated and the full amount will be due at once, and your home posted for foreclosure. You should receive proper notice of the foreclosure, at least three (3) weeks prior to the actual sale of your home.
At foreclosure, the property is sold to the highest bidder, usually the creditor itself. If your mortgage is guaranteed, such as a VA or FHA loan, the creditor will be paid off.
The creditor, or its guarantor, will then sell the home and apply the proceeds against the costs of foreclosure, fix-up, resale and the balance of your mortgage. If the proceeds of this sale are equal to or more than this amount, you will have no further liability. If the proceeds of this sale are less than this amount, which is usually the case, there is a resulting deficiency. You are obligated to pay this deficiency. Like any other debt, the creditor can pursue whatever collection action it deems appropriate.
The filing of a debt consolidation petition prior to the actual sale of your home may give you the opportunity to stop the foreclosure, keep your home and pay the arrearage over a reasonable period of time while continuing to make future mortgage payments. The mortgage holder can only continue with the foreclosure if it receives permission from the Court. In most instances, the Court will not allow the foreclosure to proceed if you are capable of making your current mortgage payments and catching up what you are behind within a reasonable period of time.
If your mortgage payments are behind, you should immediately determine your debt consolidation options. Quick action can possibly avoid the foreclosure altogether allowing you to keep your home and avoid expensive additional costs and fees.
When you get behind on the payment of a debt which is secured by a security interest or lien on your car, furniture, jewelry, or other personal items, the creditor can proceed to repossess these items. Upon repossession, the items are sold and proceeds are credited to the amount you owe. If the sale proceeds are equal to or greater than the debt, you have no further liability. If the sale proceeds are less than the debt, which is quite often the case, you owe the amount of the deficiency. Like any other debt, the creditor can take whatever collection actions it deems appropriate, including filing a lawsuit against you.
The filing of a debt consolidation petition may give you the opportunity to stop the repossession, keep the item and pay for it under controlled circumstances at a rate you can afford.
The filing of a Chapter 13 debt consolidation petition will usually allow you to keep all of your possessions. In a debt consolidation proceeding, creditors are usually paid out of your income and from your property. You are, in fact, repaying your debts. Accordingly, you are usually allowed to keep your property.
Sometimes, the most valuable feature of a debt consolidation proceeding is the Automatic Stay gained instantaneously upon the filing of a petition. When a person gets behind in paying his debts, creditors begin to take various actions to collect:
The filing of a debt consolidation petition automatically stops a creditor from further collection efforts. No more phone calls, letters, bill collectors, foreclosures, repossessions, demands on co-signers in some instances, garnishments or seizures by the IRS, lawsuits or judgments; all collection efforts stop until the creditor first files a request with the court to get permission to continue collections. Beyond all this, the Automatic Stay affords an opportunity for the debtor to have a breathing spell, a chance to sort things out, through the additional time gained to solve problems.
Often, the filing of a debt consolidation petition can provide benefit to an individual facing student loan obligations. Federal law provides that student loan obligations are generally non-dischargeable in any type of bankruptcy proceeding. The only exception to this general rule is if the loan repayment would cause the individual “undue hardship”.
Nevertheless, inclusion of a student loan obligation in a debt consolidation proceeding may provide some benefit. Importantly, the Automatic Stay provisions of a debt consolidation proceeding apply to student loan creditors even though a student loan is not dischargeable. Accordingly, the filing of a debt consolidation petition will stop telephone calls, harassment, lawsuits, and garnishments from proceeding without permission of the Court. Also, if you are able to satisfy your entire student loan obligation during the term of your debt consolidation plan, you may avoid interest and late charges which would otherwise become due on such obligation. If you are delinquent on your student loan obligations, you should consider the filing of a debt consolidation petition.
Although taxes cannot be avoided through a debt consolidation proceeding, they can be repaid over a period not to exceed five (5) years and, often, in a monthly amount the taxpayer can afford, rather than the amount the IRS is demanding. Debt consolidation is the only tax repayment relief available to the tax payer for non-dischargeable taxes other than having the IRS agree to your terms of repayment.
Once debt consolidation is filed, the IRS cannot garnish your wages, seize your bank account, close your business, perfect a tax lien or take any other collection effort. There are generally two kinds of tax obligations. One is a secured obligation, where the IRS has perfected a tax lien on your property and the other type is unsecured.
If you file a debt consolidation petition and your tax obligation is unsecured, then the tax obligation accrues no further interest or penalty charges. This could amount to a substantial savings over a five (5) year period of repayment. If you have an unmanageable tax obligation, you should act immediately to determine your debt consolidation options and avoid the possibility of having the IRS take collection measures against you or perfect a tax lien which means you may have to pay interest and penalties on the tax obligation.
A major concern that most of our clients have is to what extent their credit will be affected by filing a debt consolidation proceeding. Your credit will be adversely affected. There is no question about that. The fact of your filing will be reflected on your credit report for a period of ten (10) years from the date your petition is filed. That, however, is not the main issue. It is important to recognize that your underlying financial problems are the real cause of your negative credit, not the debt consolidation. Actually, filing a debt consolidation petition can be the first step in reestablishing your credit. As stated, a debt consolidation filing will be on your credit report for a period of ten (10) years. However, any negative or bad information currently on your credit report will stay on your credit report for a period of seven (7) years and that time period does not start until you pay off your creditors in full or it is “written off as a bad debt.” As a practical matter, your credit will be affected for a period of at least seven (7) years without your doing anything. The reason we say that filing a debt consolidation may be the first step in reestablishing your credit is that it provides a cut-off, or a beginning point for you to obtain a fresh start.
A debt consolidation plan generally lasts for three (3) years to five (5) years, unless all debts can be paid off in full in less time. A debt consolidation plan cannot last longer than five (5) years.
The filing of a debt consolidation proceeding prevents any lawsuits from being filed or judgments taken against you. If you file a debt consolidation petition and a lawsuit against you is pending, it can go no further. If a judgment has been taken, its enforcement can go no further, without first getting permission from the bankruptcy court.
If there are potential lawsuits against you, often the bankruptcy court offers a forum where the dispute can be rapidly settled–thus avoiding the time and expense of litigating the matter in state court. If a judgment has already been taken against you, you may be able to arrange payment and satisfaction of the judgment over a period not to exceed five (5) years. If lawsuits or judgments are either a threat or an existing problem, there may be relief available for you.
An employer may not discriminate against you for filing a debt consolidation. It is illegal for either private or governmental employers to discriminate against a person as to employment for filing debt consolidation. It is also illegal for local, state, or federal governmental agencies to discriminate against a person as to granting of licenses, permits, and similar grants because that person has filed debt consolidation. It is also illegal for governmental student loan or grant units to deny a student loan or grant solely on the basis of filing.
Under Chapter 13, the court has powers to aid you that private debt consolidation services do not have. For example, the court has the power to prohibit creditors from attaching or foreclosing on your property, the power to force unsecured creditors to accept a Chapter 13 plan that pays only a portion of their claims, and the power to discharge a debtor from the unpaid portion of debts. Private debt consolidation services have none of these powers.
Chapter 13 is usually preferable for a debtor who:
Must All Debts Be Paid In Full?
Not all debts must be paid in full in a debt consolidation proceeding. While certain debts, such as tax debts and fully secured debts, must be paid in full under a Chapter 13 plan, only an amount that you can reasonably afford must be paid on most debts. The unpaid balance of most debts that are not paid in full under a Chapter 13 plan is discharged upon completion of the plan.
If you seek relief to repay your debts under a debt consolidation proceeding, an individual co-debtor is protected, to the extent that the plan proposes to repay the debt in full, and if the following conditions are met:
As long as your debt consolidation is pending, then the creditor cannot act to collect all or any part of the obligation, including the filing of a lawsuit, without first getting permission from the bankruptcy court.
This permission will not ordinarily be granted if your plan of repayment has been approved and you are making the required payments under your plan.
The purpose of this provision is to allow you the opportunity to repay your debt without permitting your creditor to bring undue pressure on you by approaching a co-debtor for repayment.
A husband and wife may file jointly under Chapter 13 and should do so if both are liable for any significant debts. There is no mandatory requirement, however, that a husband and wife both file under Chapter 13. Whether or not you and your spouse should file jointly should be determined following a consultation with an attorney.
A debtor who is unable to complete his or her debt consolidation payments has three (3) options:
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