One of the great advantages of a Chapter 13 for homeowners who have lost equity in their homes is that a Chapter 13 bankruptcy permits homeowners to strip the second mortgage off their home where that second mortgage or lien is completely unsecured. In many Chapter 13 Plans, the second mortgage creditor is ultimately paid a small percentage of what it is owed for that debt. The most common reason for this is because the plan payment proposed is not enough to cover the full amount of what is owed and the creditor is paid from a pool of funds it has to share with other unsecured creditors such as credit cards. In these cases, the debtor does pay back some of that second mortgage but this amount is substantially less than what that debtor would have paid over time if he or she made all the payments required by the original agreement.
However, this is not always the case, especially where bankruptcy debtors may have a substantial amount of disposable income each month. This is the scenario that played out in In re Renz (Bankr. Court EDNY August 1, 2012) . Much of the focus of this case was on whether or not the Debtors should be permitted to withdraw a claim they filed on behalf of a mortgage creditor whose lien they stripped and subsequently pay this creditor nothing in an amended plan. The Court concluded the Debtors could not proceed in this manner. But, the Court also brought up the point that these debtors had enough disposable income to pay this particular debt back in full. So, even though the debtors were successful in stripping the second mortgage lien, the Court would not permit their plan to be confirmed unless the disposable income they calculated they had each month was committed to the plan. In this case, the Court's ruling meant that if the debtors wanted their case to be confirmed, the second mortgage creditor would have get paid back some, if not all, of their "claimed" debt. At least it would be interest free.
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