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How a Chapter 13 bankruptcy can save the house

Perhaps the most common question asked by Tennessee residents who are contemplating filing a bankruptcy petition is whether they will lose their home in the bankruptcy proceeding. The question does not have a simple answer. The legal and financial effects of a bankruptcy depend upon the type of petition that is filed and the financial situation of the debtor.

The proceeding that offers the most certain opportunity to maintain possession and ownership of the family home is a Chapter 13 bankruptcy, often referred to as a wage earner's bankruptcy. In a Chapter 13 bankruptcy, the debtor provides a complete list of all debts, including home loans, auto loans, credit card debts, and all other obligations. Under the supervision of the United States bankruptcy trustee, the debtor then negotiates new terms for outstanding loans. The plan must specify a method for paying the loans or at least bringing them current within three to five years.

The repayment schedule will depend upon whether the debtor's disposable income is sufficient to make the scheduled payments. The debtor must also demonstrate that the creditors would receive at least as much as if the debtor had filed a Chapter 7 petition. A Chapter 13 bankruptcy offers the best chance of keeping important assets, such as the family home or automobile because it does not require liquidation of assets to pay off creditors, which is what occurs under a Chapter 7 filing. In order to qualify for a Chapter 13 proceeding, the debtor must have a "regular source of income" and at least some disposable income that can be applied to making the required payments.

Choosing between the complete liquidation of dischargeable debts in a Chapter 7 proceeding or a rearrangement of debt in a Chapter 13 proceeding can be a complex decision. The advice of an experienced bankruptcy lawyer is often necessary to make this choice.

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