Major Advantages of Chapter 13 for Saving Your Home

If you are behind on your mortgage(s) and/or on other debts on your home, Chapter 13 gives you some tremendous tools for dealing with them.

 

Last week’s blog post was about not filing a Chapter 13 case to save your home when a Chapter 7 “straight bankruptcy” would serve you better. Sometimes you don’t need the additional advantages that Chapter 13 provides to keep your home. Or in situations on the other extreme, sometimes even those advantages are not enough to enable you to keep your home.

In that same blog post I introduced five of those Chapter 13 advantages. I’ll just mention them here (partly to entice you to look at what I wrote about them last week). Then I’ll give you five more major ways Chapter 13 helps you with home debts.

The First Five Chapter 13 Advantages

1. More time to catch up on any back mortgage payments.

2. Stripping second or third mortgage.

3. The flexibility that comes from getting extended protection from your mortgage holder(s).

4. A good way to catch up on any back real property taxes.

5. Protect your home from previously recorded and upcoming income tax liens.

6. The Chapter 13 “Super-Discharge”

You can “discharge” (permanently write off) certain very specialized debts in a Chapter 13 case that you cannot in a Chapter 7 one. There are two main kinds of debts that you can only discharge under Chapter 13:

1. obligations arising out of a divorce decree dealing with the division of property and of debt (but NOT the provisions about child/spousal support); and

2. obligations involving “willful and malicious injury” to  property (but NOT bodily injury or death, and not if the injury was related to driving while intoxicated).

So if you owe a significant amount in one of these two unusual kinds of debts, it’s worth considering Chapter 13 as a possible solution.

7. Debts Which Cannot Be Discharged Such as Income Taxes & Back Child/Spousal Support

If you owe any of those special debts which cannot be discharged in bankruptcy, as soon as you finish a Chapter 7 case (usually only about three or four months after you start it) the creditors on those debts can start collecting on them from you. Those particular creditors—such as the IRS, the state taxing authority, the state or local support enforcement agencies, and your ex-spouse—often have extraordinary collection powers. They can put a tax lien or support lien on your home, and under some circumstances can even seize and sell your home to pay those liens.

In great contrast, a Chapter 13 case protects you while you pay off those special debts in a payment plan that you propose and is reviewed and approved by the bankruptcy judge assigned to your case. During the 3-to-5-year plan, all of your creditors—including the ones just mentioned above—are prevented from putting liens on your home. By the completion of your Chapter 13 case those special debts are paid in full or paid current, so that they can’t threaten you or your home any more.

8. “Statutory Liens”: Utility, Contractors, Municipal/Local and Other Involuntary Liens

If you had an involuntary liens imposed by law against your home before you file bankruptcy, those liens would very likely survive a Chapter 7 bankruptcy.

These are called “statutory liens” because they are set up through state statutes, or laws. A utility lien is for an unpaid utility bill. A contractor’s lien (sometimes called a “mechanic’s” or “materialman’s” lien) is for an unpaid, and usually disputed, home remodeling or repair debt. Cities and other local governments can impose a wide variety of fees against your property—such as for failing to keep vegetation trimmed to prevent a fire hazard—which then become liens if not paid.

These liens against your home generally survive a Chapter 7 case, and so these creditors would be able either to threaten foreclosure of your home to force payment, or at least would force payment whenever you’d sell or refinance your home. Under Chapter 13, in contrast, the protection for your home would generally continue throughout the three-to-five year case, keeping it safe while you satisfy the lien.

9. Judgment Lien “Avoidance”

A judgment lien is one that is placed on your home after someone (usually a creditor) sues you, gets a judgment against you, and records that judgment in the county where your home is located (or uses whatever the appropriate procedure is in your state).

In bankruptcy a judgment lien can be removed from your home under certain circumstances, that is, if that judgment lien “impairs” your homestead exemption. The homestead exemption is the amount of equity in your home that the bankruptcy law protects from your creditors. “Impairing” the homestead exemption means that the judgment lien eats into the part of the equity in your home that is protected by the exemption.

Although judgment lien avoidances are available under Chapter 7 as well as Chapter 13, it can often be put to better use in Chapter 13 when used in combination with advantages available only under Chapter 13.

To illustrate with an example, imagine if the amount of home equity that you have in your home would allow you to remove a judgment lien (because that lien eats into equity protected by the homestead exemption), but you are so far behind on your mortgage payments that you would lose your home to a foreclosure by your mortgage lender if you filed a Chapter 7 case. Removing that judgment lien from your home title would be meaningless if you will lose your home to foreclosure. Curing that mortgage arrears under Chapter 13 makes your power to remove the judgment lien worthwhile in a real and practical way.

10.  Protect Equity in Your Home NOT Covered by the Homestead Exemption

With home property values increasing in most parts of the country the last couple years, after major declines during the Great Recession, there are more situations in which the amount of protection provided by the applicable homestead exemption is not enough to cover all the equity.  Most people contemplating bankruptcy probably still don’t have too much equity in their homes. But if you DO have more value in your home than allowed under your homestead exemption, Chapter 13 can protect it unlike a “liquidating” Chapter 7 case.

If you have equity in your home beyond the homestead exemption’s protection, in a Chapter 7 case you run the risk of a Chapter 7 trustee seizing it to sell and pay the unprotected portion of the proceeds to your creditors. Under Chapter 13, in contrast, you can keep the home by paying those creditors gradually over the course of the up-to-five-year Chapter 13 case.

Or you may not want to do that, or you may not have the money in your budget to do that within five years. Then you can sell the home yourself on your own schedule, likely even a few years later, in order to pay the creditors that unprotected portion of the equity, while keeping the homestead exemption amount to put into your next rented or purchased home. In either situation, Chapter 13 leaves you much more in control of your home and your life.

 

/by

When You Should Avoid Using Chapter 13 to Save Your Home

Chapter 13 provides awesome tools for hanging onto your home. Yet sometimes Chapter 7 is enough and better.

 

Chapter 13 and Your Home

Chapter 7—sometimes called “straight bankruptcy—is much simpler and takes much less time than Chapter 13, the version of bankruptcy with a three-to-five-year court-approved payment plan. But Chapter 13 can help in so many ways with home-related debts that people who are behind on their mortgage or have other kinds of liens on their home tend to leap to that option.

In upcoming blogs I’ll talk about all the many ways that Chapter 13 can help. But to give you a taste of them, some of the main ones include:

1. More time to catch up on any back mortgage payments: Chapter 7 gives you a limited amount of time, usually a year at the most, to catch up. Chapter 13 often gives you years, which greatly reduces how much you have to pay each month to eventually get current.

2. Stripping second or third mortgage:  Under Chapter 7 you have to simply pay any junior mortgages. Chapter 13 gives you the possibility of “stripping” a second or third mortgage lien off your home title, potentially saving you hundreds of dollars monthly, and thousands or even tens of thousands of dollars in the long run.

3. The flexibility that comes from getting extended protection from your mortgage holder(s): Chapter 7 gives you at most only about three or four months while your mortgage holder can’t foreclose and your other creditors can’t take action against you or your home. In contrast, under Chapter 13 you could potentially be protected for years. This can often give you creative ways to meet your goals, such as letting you delay selling your home for several years.

4. A good way to catch up on any back real property taxes: Filing a Chapter 7 case doesn’t protect you from property tax foreclosure—beyond the three, four months that the case lasts. Chapter 13 protects you and your home while you gradually catch up on those taxes, in a court-approved plan that also incorporates your mortgage(s) and all other debts.

5. Protects your home from previously recorded and upcoming income tax liens: Chapter 7 usually does nothing to address tax liens that have already been recorded on the home, or to stop future tax liens on income taxes that you continue to owe after the bankruptcy case is completed. In contrast Chapter 13 provides an efficient and effective procedure for valuing, paying off, and getting the release of tax liens. And the IRS/state cannot record a tax lien on income taxes while the Chapter 13 case is active.

That may all sound pretty good (and there’s more). But still, Chapter 13 may be neither necessary nor appropriate in your situation.

Consider Chapter 7 Instead of Chapter 13 When Chapter 7 is Enough

If you are behind on your mortgage payments, but could realistically catch up within about a year, you may not need the stronger medicine of Chapter 13. If you could catch up after writing off all or most of your debts in a Chapter 7 case, and by being financially very disciplined for that one year, that would likely be the wiser way to go.

Most mortgage lenders will negotiate a “forbearance agreement” with you after you file a Chapter 7 case, allowing you to stay in your home and to catch up on your mortgage arrearage by paying a certain amount extra per month. How much time you will have to get current on your mortgage depends on your lender’s practices, your payment history with that lender, and other related factors.

Considering the benefit of getting to your fresh start in a year or so, instead of three to five years, be sure to carefully discuss with your attorney whether solving your mortgage arrearage problem through Chapter 7 looks feasible. Of course also look at all the other advantages and disadvantages of these two options in light of all the rest of your financial circumstances.

Consider Chapter 7 When Chapter 13 Will Not Likely Do Enough

As powerful as Chapter 13 can be, it has its own limitations regarding home debts. For example, it does not have the ability to reduce your first mortgage payment or mortgage balance. It can’t reduce your annual property taxes or discharge (legally write off) any property taxes.  And if you subsequently cannot maintain the payments you agree to in your Chapter 13 plan, you could very well lose the protection against foreclosure and other collection efforts against you.

Especially if your home is under water—you owe on it more than it’s worth—try to think practically about whether the effort to keep the property will be worth the effort. Even if you do have some equity in the property, if you are really going way out on a limb to catch up on the mortgage arrearage and other debts related to the home, carefully consider whether you will really be able to pay what you are arranging to pay. If you pay a bunch of extra money over the course of a year or two only to not be able to maintain the necessary payments and lose the home, you could waste a lot of your time, money, and effort.

As you honestly discuss with your attorney your financial goals, consider whether filing a Chapter 7  case and letting your house go would actually be a better way to meet your (and your family’s) real needs. Chapter 13 should not be a last-ditch long-shot. Be honest with yourself that you may be trying to hang onto a house that you won’t be able to even with all the help that Chapter 13 can provide.

 

/by