CHAPTER 13 SEVERANCE: A SIMPLE, YET POWERFUL, TOOL FOR WEALTHY HOMEOWNERS 

Chapter 13 Severance

Many wealthy homeowners simply make too much money to be eligible for a Chapter 7 discharge, and since they have large incomes, banks are not likely to discuss any kind of settlement on their underwater homes since they can afford their mortgage payments. However, in situations such as these where homeowners likely have incomes over $100,000, Chapter 13 severance provides an enticing option with a predictable outcome.

Basically, a Chapter 13 severance is when a homeowner files for a Chapter 13 bankruptcy and then severs their mortgage from the home's promissory note in full satisfaction of the secured claim.

For example, imagine a couple named Blake and Crystal, who are both doctors. They make well over $100,000 a year, but currently live in a house only worth $400,000 even though they purchased the home for $800,000 and still owe $600,000. Further imagine that their mortgage payment is $7,000 a month, including taxes and insurance - meaning they will pay a total of $420,000 over five years on a home currently only worth $400,000. Keep in mind that this number doesn't even include the money that Blake and Crystal will spend on home maintenance. Since they will likely not recover any equity for many years, a Chapter 13 severance may make sense for Blake and Crystal, even if they can afford their current monthly payments.

After filing for a Chapter 13 severance, Blake and Crystal continue to retain the title in their home, but they have now severed their personal liability for the $600,000 still owed to the bank - meaning they now owe the bank nothing on that secured claim. Also, while this entire process is going on - usually 12 to 18 months - Blake and Crystal will likely be able to stay in their home and will not have to make any mortgage payments. During this time, they are free to attempt to negotiate with their bank in an attempt to get better terms, but even if they choose to leave, the bank cannot pursue Blake and Crystal for a deficiency judgment - for example, if they bank sells the home for only $350,000 even though Blake and Crystal still owed $600,000. They are completely free from this liability. In addition, Blake and Crystal's credit will likely recover quickly since most Chapter 13 repayment plans required repayment within three to five years.

It is important to note that this article barely scratches the surface of this complex and intricate Chapter 13 severance process - and as such, this article should not be considered legal advice. However, if you believe that a Chapter 13 bankruptcy or severance may be helpful to you, it is important to speak with an experienced bankruptcy attorney in your area to be advised of your options.