If all debt management options have been exhausted, a debtor can consider filing for bankruptcy as a last resort. If approved, a court order will be issued and the bankruptcy judge will discharge the debtor from the obligation to pay certain debts. It is a legal procedure that offers the opportunity to have a clean slate after being caught in a financial crisis.

A debtor could either file for chapter 13 or chapter 7 bankruptcy. Chapter 7 bankruptcy is often described as the “traditional” or “straight” bankruptcy. It involves the liquidation of non-exempt assets. On the other hand, chapter 13 enables the debtor to keep his property, such as a mortgaged house or vehicle if he gets the court approval for his repayment plan. This type of bankruptcy is suitable for people with sufficient income to stay current with debts and other priority payments. The court will then grant the discharge of debts after the fulfillment of the repayment plan.

Cram Down

There are certain debts where monthly payments could be reduced in a chapter 13 repayment plan. This process is also called “cramdown”. However, this option is not available for mortgages on the debtor’s primary residence. Congress has considered amending bankruptcy law to incorporate the cramdown option for primary residences but as of this date, such bill has not yet been passed. Nevertheless, a debtor could still reduce monthly payments for certain debts or even eliminate them entirely. A second mortgage, for instance, could be “stripped off” from the mortgaged home and converted to an unsecured debt in the repayment plan.

Eligibility for Lien Avoidance

First, the debtor needs to file for chapter 13 bankruptcy. Second, the value of the home has to be less than the amount of the primary mortgage because in such a case, the second lien would not be covered by the value of the property.

To initiate the proceeding, the debtor is required to file a motion for “lien avoidance”. This is the procedure where certain liens, such as the second mortgage lien, could be reduced or eliminated. If the court approves the lien avoidance, the debtor will still owe the debt but it will be unsecured. Due to this conversion, the creditor of the second mortgage will only get a share of the money allocated for unsecured creditors. The debtor will be subject to the repayment of unsecured debts only if all secured debts have been repaid. Thus, the creditor of the second mortgage will only be paid to the extent all other unsecured creditors will be paid, which could only be pennies on the dollar. This is why chapter 13 bankruptcy filings are known to lead to the elimination of second mortgages.

Legal Counsel

An easy, straightforward case might not require the representation of a lawyer but if one or more creditors contest the request, the debtor should seek the advice of a bankruptcy lawyer. In Denver, Cimino Benham lawyers have gained popularity through the numerous chapter 13 filings they have successfully completed. Even though federal laws apply in bankruptcy matters, local rules would have to be considered in the bankruptcy procedure. For this reason, the legal assistance of local, well-experienced Denver bankruptcy law firms, such as Cimino Benham, is inevitable.

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