Lately, I have been talking to a lot of folks who are considering hiring debt consolidation companies. Those of you who have already consulted with me or have read my blog on this subject (November 2, 2010) already know what I am going to say …Don’t do it!
Chapter 13 bankruptcy vs. Consolidate debt
For those of you who want to consolidate your debt, the better option can be Chapter 13 bankruptcy. Not only does the law provide that your debts be consolidated and reorganized in a Chapter 13 plan, but Chapter 13 allows you to reduce the amount you owe on certain secured debts to the value of the collateral.
For instance, if you owe $20,000 on a car that is only worth $10,000, you can reduce the debt to only $10,000 and pay off that amount in equal installments over the life of your 13 repayment plan. This strategy is called a “cramdown.”Doing this allows you to keep your car and be able to afford the payments in your plan.
You can’t cramdown mortgage liens on your home, but what you can do is “strip off” a second or even third
mortgage and treat it as an unsecured debt in your Chapter 13 plan. This might be an option if the current market
value of your home is less than what you owe on your first mortgage (“underwater”) leaving no equity to secure the
second or third mortgage.
This procedure allows you to greatly reduce the amount you have to pay each month to stay current on your
home. For example, assume you pay $1,500 on your first mortgage, $750 on your second, and $400 on your third
(this might be a home equity loan). If your home is worth $200,000 and you owe at least that much on your first
mortgage, you can strip off the second and third mortgages. This would reduce your monthly mortgage payment from
$2650 to $1,500.
Sounds good, doesn’t it? Better than paying a debt consoldation company AND still end up losing your home?
At the Law Office of Debra G. Simms, we offer bankruptcy consultations. What have you got to lose?
