Throughout history, many people have found themselves facing severe financial constraints that arise from unsuccessful ventures. In most cases, you may end up in a tough financial position when an investment fails to yield the projected returns. Purchasing property outside your reach is also a prime contributor to facing adverse economic consequences that may force you to file for bankruptcy. Regardless of the reasons leading to being in a state of bankruptcy, you can seek several remedies to ease the load of debt repayment. Among the options is trying to reduce the principal on your secured debt, to reduce the financial burden you need to settle.
While applying for bankruptcy and a principal reduction is highly advisable to reduce the burden on repaying your creditors, you may find it hectic to conduct on your own. Having the services of a bankruptcy attorney will work to your advantage, mainly because he/she ensures that all agreements meet your interests first. At the San Diego Bankruptcy Attorney, you are assured of comprehensive and expeditious bankruptcy services. We have worked with many clients and helped them to reach amicable settlements by reducing the principal on their investment property.
When you are unable to meet your financial obligations, including paying monthly bills, servicing loans, and mortgages along with any other payments you have to make, you should consider filing for bankruptcy. One of the ways to attain the title is through voluntary application whereby you decide to submit a request in court to declare your state. We recommend choosing a voluntary declaration of bankruptcy, mainly because it offers you more protection and extended time against repayment to your creditors.
On the other hand, if you choose to wait for your creditors or debt collectors to take action against you, you will undergo an involuntary declaration of bankruptcy. For this option, your creditors are responsible for filing a petition in court seeking remedies against you to push you into making repayment of any debts you have. Consequently, your creditors have better leverage against you in such a situation because you hold the defaulter status. While you may still receive some lenient allowances to make payments, you will have to work on the debtor’s timeline and requirements or face additional court sanctions.
Benefits of Declaring Bankruptcy
The primary advantage of choosing to file for bankruptcy is that you will receive an automatic stay of execution. The stay is a court order that prevents your creditors from undertaking any further steps towards repossession of your property to pay off debts. A stay buys you time to organize a payment strategy with the additional help of an appointed trustee.
Moreover, you can prevent the foreclosure of your home, mainly where property debts are in question. With Chapter 13 bankruptcy, your primary residence is exempted from repossession and foreclosure, meaning that you can work out a payment plan to clear your debt without forfeiting your home.
Also, you can apply additional services like reducing the principal on secured debts. Primarily, such a move will help you pay a significantly lower price for all property you acquired through creditors.
The Best Type of Bankruptcy Applicable to Reducing Principal on Property
The concept of principal reduction is commonly known as cramming down on a property. Typically, a cram down works to reduce the price you pay on secured debt by applying the current fair market value for the property. For example, if you purchased a vehicle through a service loan for the cost of $9,000, you can scrap the price tag attached to loan payment and use the current market price to pay off the debt you owe the car seller. Therefore, if the car’s current market value stands at $7,000, the price will be your new repayment target. After paying for the total, your debt clears thanks to the cramming down used to reduce the amount payable.
Often, reducing the principal applies to mortgaged property and car loans because the cost can cut and still present fair market value. Therefore, while filing for bankruptcy, it is crucial to consider a type of bankruptcy that accommodates debt repayment for property in a higher price range. In return, your choice will allow you to incorporate the reduction of principal problem-free.
Chapter 13 bankruptcy is the best type to use if you would like to include a cram down strategy in your debt repayment. One of the characteristics that make it the best option against several other options like Chapter 7 bankruptcy is that your secured debt bracket accommodates debts of up to $1,184,200. With this wide range, you can include your house mortgages in the cram down operation comfortably, without having to worry about your creditors complaining that the new reduced price is too low.
On the contrary, a Chapter 7 bankruptcy does not work well in this case because it covers debts for property in a lower price range that may not survive a cram-down. Additionally, most of your property undergoes liquidation when you file for chapter 7 bankruptcy, meaning that you do not get to make direct repayments because the liquidated assets are used to settle the debt instead.
Thus, in comparison, Chapter 13, bankruptcy is more applicable in reducing principal.
Overview of Chapter 13 Filing Process
Once you choose to go for chapter 13 bankruptcy, your lawyer will take you through several application procedures to ensure that you use principal reduction.
Firstly, you should complete all your documentation used to declare your bankruptcy official at a later stage. The filling of these documents occurs before filing for bankruptcy and is mainly a preparation process. After completing the paperwork and filling out the documentation successfully, you will have to undergo several pre-filing counseling sessions. The counseling meetings aim to prepare you mentally for the experiences you are likely to face throughout bankruptcy. These counseling sessions should provide you with comprehensive financial information that will help you make more informed decisions in future undertakings, to avoid debt.
When you satisfy the minimum requirements in the counseling sessions, your lawyer then proceeds to file for chapter 13 bankruptcy on your behalf. Once the judge approves all submitted documents by your attorney, he/she will impose an automatic stay of execution that affects your creditors’ actions by preventing them from repossession of your property.
On top of this, an unbiased trustee will take over your financial operations and take you through preparation for the repayment of creditors. You should organize all your documents and, with the help of your attorney, present your most recent tax returns to the trustee for analysis. If all the information in your files aligns with the submitted documents, you can begin the payment plan under chapter 13 bankruptcy. Typically, the repayment process starts within a month of presenting your tax information to your trustee.
Once you begin the repayment of debts, you can then suggest an adjustment to your current plan. At this point, you will have the chance to indicate a cram down system to reduce the principal on properties you hold debt for. However, the process does not automatically include the reduced principal, as you have to undergo a confirmation hearing in court. During the hearing, the judge provides your creditors a chance to raise their views and concerns and then proceeds to accept or turn down the adjustment plan.
If you are successful in presenting the suggestion to modify your chapter 13 payment to include a cram down, you may then apply it to repay your creditors.
Chapter 13 Bankruptcy and Principal Reduction
As established, a principal is the fixed amount on specific secured debts to your creditors. Secured debt includes a collateral item or property that your creditor has a right to possess, in case you fail to pay your debt under the agreed specifications. For example, when you take out a bank loan to purchase an investment property, you may list property like your car or an expensive household or item like a couch set to act as collateral in case you do not complete payments for the loan on time.
Obtaining a court authorization to cram down on the principal of such an agreement will help reduce the repayment pressure, mainly because you will receive a subsidized payment amount. Usually, you can cram down on most property obtained under secured debt. However, the main repayment strategies that apply principal reduction down are for car loans and house mortgages. It is important to note that the house mortgage should not be for the house you use as a primary residence, because Chapter 13 bankruptcy secures you from jeopardizing your house property. Thus the principal reduction only applies to second homes, as they are mainly viewed as an additional investment property.
When making a price reduction, it is vital to obtain credible information concerning the current market value to avoid getting duped by creditors. To do this, your lawyer can request a licensed valuation officer’s services, who will give an independent opinion on the current value of the property in question. Your valuation officer’s opinion should not vary significantly with the creditor’s valuation because there are standard guiding principles in doing an estimate. Therefore, in case of any suspicious value issued by your creditors, you can consult your bankruptcy lawyer and decide on taking further legal action.
After acquiring a fair current market value on the property you are repaying for, you will receive a new monthly payment plan that includes reduced rates for the total amount placed on it. Mostly, you will also receive a subsidized interest rate at the court’s discretion to ensure that your total payments do not exceed the newly set fair market price.
Once you complete making payments for the property under the new price fixture, the balance between the original and the subsidized market price is transferred to your unsecured debts, if any. You do not need to worry about making possible additional payments for the unsecured debts, mainly because repayments occur on a priority basis. Thus, if there are more critical debts to clear before the balance of the crammed down property, you may not need to pay for it in the end. The occurrence arises because you are allowed to make payments only for what you can afford, and the rest of the unsecured debt is cleared off. Consequently, you will receive a clean slate.
Requirements to Apply for a Principal Reduction
Your bankruptcy attorney will tell you that applying for a cram down on a property is not a straightforward process, mostly because of the rules in place to govern the advantageous position. The rationale behind satisfying specific requirements before the court allows you to cram down on a property is to prevent debtors from taking advantage of the service. If no restrictions are in place, courts would be filled with multiple applications of bankruptcy from the same parties numerous times, with all of them seeking a waiver that lets them reduce principal.
As a result, here are some of the requirements to meet before applying a cram down service:
The One-Year Rule
The one-year rule requires you to have purchased the property in question at least one year before filing for Chapter 13 bankruptcy. The one-year rule applies to all property, ranging from mortgaged second homes, vehicles, personal amusement items, among others. Therefore, you are free from making any applications for principal reduction until a year from the date of purchase lapses. In the meantime, you can engage your lawyer and trustee in presenting a request for extended repayment time from your creditors.
However, if you are unable to reach an agreement with the creditor, you may have to persevere and make several payments to hold off punitive measures until you can access the property cram down option.
The Nine Hundred and Ten-Day Rule
Under this regulation, the law requires you to have purchased a car at least two and a half years before filing for Chapter 13 bankruptcy, with an additional principal reduction. Unlike the one year rule, the 910-day principle is exclusive to the purchase of vehicles, which means that you cannot apply it to cram down any other property. The two and a half year minimum requirement is a crucial restriction for anyone who seeks to benefit unfairly from the protective measures of a chapter 13 bankruptcy.
Property Mortgage Timeline
While a cram down reduces the prices of housing property to the current market value, the chances are that you will still face challenges in making repayments on time. The problem arises because most housing property is already out of reach for most investors or buyers, forcing them to choose a mortgage payment over an upfront full-price purchase. As a result, you could still face a lot of problems while trying to meet the three to five-year mortgage repayment timeline available for chapter 13 bankruptcy.
Nevertheless, your creditor requires you to have completed the repayment after a price reduction to the market value within the set time frame. A failure to do so will lead to additional consequences on your part that may lead to the liquidation of assets to finance the outstanding amounts.
Benefits of Reduced Principal
Some of the benefits of reducing the principal on secured property debt are easy to identify, mainly because of the better position they leave you in. They are:
You Pay a Reduced Current Market Value for the Property
The basic structure of a credit company or bank loan strategy is to earn an additional amount from the property you purchase. They do this by including an interest rate that increases the total amount payable. Thus, the price you pay for the property is usually way more than the current market value as the creditors aim to make a profit. Therefore, when the property is crammed down, the repayment price reduces significantly, allowing you to pay a lower cost to clear off your debts.
The price reduction is one of the primary advantages of a cram down because it leaves you in a more comfortable position to pay creditors.
The Court Sets the Interest Rate
Another benefit of a principal reduction is that the judge has the discretion of setting the new primary rate for repayment after your property is assigned the current market price. Since the court may value yours and the creditor’s interests in debt repayment, you will receive a fair interest rate that allows you to make payments equal or close to the total market value price.
Letting the judge handle matters to do with the interest rate reduces the biased or malicious intentions that a creditor may use if he/she had the power to set the repayment rate.
You Have More Repayment Time
When paying for a mortgage debt, you will receive a lenient time allowance of three to five years to spread out your repayment. Thus, you can use the time to include new sources of income to help you service your mortgage and make the required debt settlements within the agreed time restrictions.
Additionally, the inclusive five year period is adjustable depending on the consistency of making your payments to creditors. Therefore, you can apply for a shorter repayment period if you are comfortable completing payments within a smaller time frame. Conversely, you can make the most of the maximum five year period to ensure that you complete all payments or seek the help of a third-party financier to help clear off your debts.
Find a Bankruptcy Attorney Near Me
The process of declaring yourself bankrupt leads to a whole new perspective of your financial life. We understand how challenging it is to face off all your creditors and repossession agents, especially when you are doing your best to make payments and clear your debts. At the San Diego Bankruptcy Attorney, we will help you reduce the principal on your property to ensure that your debt repayment process is more bearable. Moreover, we are happy to offer moral and legal support during the challenging period to help you get back on your feet and re-start your financial journey on a clean slate. Give us a call today at 619-488-6168.