Chapter 13 Bankruptcy

Cram Down — Reduce Your Car Loan to the Vehicle's Value

Cram down is one of the most powerful tools available in Chapter 13 — and it is not available in Chapter 7. Cram down is the bifurcation — or splitting — of a car loan into two parts: secured and unsecured. The secured portion is based on the current market value of the vehicle. The unsecured portion is the difference between what you owe and what the car is worth. Example: If you owe $10,000 on a car worth $5,000 at 12% interest with a $223/month payment, cram down reduces your balance to $5,000 and your interest rate to 6% — dropping your payment to $97/month. That is a savings of $126/month, or $7,560 over 5 years. Eligibility: The vehicle must have been purchased more than 910 days before the bankruptcy filing date.

Lien Stripping — Available in Chapter 13, Not Chapter 7

Lien stripping — an adversary proceeding to obtain a court order avoiding a junior lien — is available in Chapter 13, but only if you complete the plan. Eligibility: You must have an appraisal showing the value of your home is less than the balance on the first mortgage. If the value is even one dollar more than the first mortgage balance, lien stripping of the second lien is unavailable. For homeowners who have suffered a significant drop in home value, lien stripping can allow equity to begin building again.

Foreclosure & Bankruptcy — Washington State (RCW 61.12)

Washington foreclosure law is governed by RCW 61.12. Personal Liability vs. Liens: • The Promissory Note — creates your personal liability for the debt. • The Deed of Trust — creates the lien on your home, which includes the right to foreclose. It is personal liability that is discharged in bankruptcy. Liens are unaffected by discharge — except in certain cases (see Lien Stripping and Cram Down). For homeowners with only one original purchase money mortgage that has never been refinanced: if the bank forecloses through a non-judicial foreclosure, the bank cannot sue you personally for the deficiency. This protection is called Non-Recourse.

Top 10 Chapter 13 Pitfalls

1. Failure to Make or Catch Up Plan Payments — the first full payment is due 30 days after filing. 2. Failure to Budget — Chapter 13 takes 100% of your disposable income for 3–5 years. 3. Using Credit — do not use credit without a Court Order while in Chapter 13. 4. Not Staying Current on Taxes — new tax debt while in Chapter 13 can cause dismissal. 5. Not Sending the Trustee Tax Refunds Above $1,500. 6. Not Sending the Trustee a Copy of Your Tax Return each year. 7. Failure to Report Increased Income — your plan payment may increase. 8. Buying a Car — requires Court approval: $400/month max payment, $15,000 max price, 20% max interest. 9. Failure to Pay Child Support — must remain current throughout the plan. 10. Post-Petition HOA Dues — personal liability continues until title leaves your name.

Realistic Expectations — Plan Completion Rates

About 90% of Chapter 13 plans are not completed. The vast majority are dismissed or converted to Chapter 7. Of 100 bankruptcy cases, approximately 70 will be Chapter 7 and 30 will be Chapter 13 — and of those 30, only about 3 will complete their plans. Chapter 13 is much more of a last resort than Chapter 7. Debtors should have realistic expectations about the likely dismissal of their case before completion.

National Data Center — Track Your Case

A National Data Center maintains records for all Chapter 13 cases. Create a free account at ndc.org to track payments, claims, and disbursements in your case. Make payments to the Chapter 13 Trustee at seattlech13.com.