A discharge in bankruptcy voids judgments and personal liability with respect to any debt discharged. Discharge prevents any future collection process. In bankruptcy you may discharge most unsecured debts, including medical bills. You may discharge all of your unsecured debts in a Chapter 7 liquidation or you may discharge a significant portion of your unsecured debts in a Chapter 13 plan. There are exceptions to debts that can be discharged, such as student loans (A hardship discharge is possible. Case: StudentLoan-Hardship-Denied; Hardship-Granted), certain tax obligations, and domestic support obligations. “Unsecured” means that the debt is not “secured” by an interest in property. A creditor that is secured by an interest in property has a lien on the property.
Generally, liens are not dischargeable in bankruptcy. However, some liens (judgment liens and mechanics liens) may be voided by the court, which makes them unsecured debt. Most liens may be modified in bankruptcy. This means that the bankruptcy court may modify the payment on your primary vehicle so that your monthly expenses are made more manageable. This ability to modify liens is especially valuable to small businesses that have liens on equipment or inventory. Although a Chapter 13 plan provides the opportunity to keep property that you are using and that you need to truly have a fresh start, it does not mean that you can keep all property that has a lien on it.
Cases On Liens:
If the property is more burdensome than useful, the trustee may abandon the property to the creditor. Or if you cannot provide for payment in full during your repayment period then you may have to surrender the property. This is a fine line because if you could afford a very large payment for property then you will not qualify for bankruptcy protection! The practical result is that in a Chapter 13 you get to keep personal goods and business tools that you would have to sell in a Chapter 7, but you may not get to keep property that has a lien on it and is not truly necessary to your fresh start.
The bankruptcy court cannot order banks to rework home mortgages, however, there is pressure from Congress on banks to work with debtors to make home mortgages more manageable.
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If you are in bankruptcy, court approval is required. Your attorney can provide the court with a consent order to modify your home mortgage that reflects an agreement between you and your bank. The court will approve of the order if the order provides the following:
- There is no extension of additional funds beyond what is already owed;
- Payments to other lien holders under the plan will not be affected;
- The proposed modification has no detrimental effect on other creditors;
- The proposal is in the best interest of the debtor and the estate; and
- Whether payment to the creditor will continue or terminate.
Past Due Amounts (Arrearage)
You must pay all past due amounts in your Chapter 13 or Chapter 11 plan if you are not going to surrender the property. However, the Bankruptcy Petition stops all fees and the past due amount is repaid at a 0% interest rate.