Specific Creditor Actions that Aren’t Stopped by a Bankruptcy Filing

Virtually all actions by creditors to collect the debts you owe are stopped the minute you file bankruptcy. Here are some special exceptions.  

The “Automatic Stay”

The immediate stopping of collections—called the “automatic stay”—is one of the most important benefits of filing bankruptcy. It’s automatic because it is put into operation by the mere act of filing bankruptcy. It doesn’t need any action by the bankruptcy court or anybody else to become effective. Its purpose is to stay, or stop, all collections.

Because the “automatic stay” is a benefit that a person filing bankruptcy counts on so much, it is very important to understand its exceptions—situations in which a creditor can continue acting in spite of your bankruptcy filing.

The Exceptions

The exceptions all apply to very specific kinds of creditor actions, done by very specific kinds of creditors.

1. Criminal Matters:

A district attorney or other governmental authority can start or continue a criminal case against you. That means that any step of a criminal case against you can proceed regardless of your bankruptcy filing: you can be indicted, tried, and sentenced, and incarcerated.

On a practical level it’s important to realize that this exception doesn’t just apply to felonies and misdemeanors, but sometimes also to mundane matters that you might not consider “criminal” like traffic infractions. These may even differ state by state.

In many other areas, the line between criminal and civil proceedings, and between criminal and civil debts, can get hazy. Examples are an employee’s embezzlement, a vehicle repair shop’s illegal disposal of its hazardous waste, and a bar fight. Each of these could involve either criminal charges or civil claims, or both.

Be sure to tell your bankruptcy attorney about anything unusual such as these, so that you are both prepared for any criminal proceeding that would not be stopped by your bankruptcy case.

2. Family court:

Your ex-spouse, or soon-to-be ex-spouse, or somebody on his or her behalf, can start or continue various kinds of divorce and family court proceedings:

  • to establish paternity of a child
  • to determine or change the amount of child or spousal support to be paid
  • to resolve child custody or visitation issues
  • to address domestic violence disputes
  • to dissolve a marriage (but marriage dissolution cannot include a determination about how assets or debts would be divided between the spouses)

3. Collection of Child or Spousal Support:

  • ongoing support can continue to be collected by its payee, directly or through support enforcement agencies, regardless of any kind of bankruptcy filing
  • unpaid support arrearage can also start or continue to be collected, at least in spite of a Chapter 7 filing:
    • through wage withholdings
    • garnishment of bank accounts
    • seizure of a tax refunds
    • suspension of a driver’s licenses (both regular and occupational)
    • suspension of virtually all other licenses issued by the government, including occupational and professional licenses, and even hunting or other recreational licenses.
    • In contrast, a Chapter 13 filing CAN stop these aggressive methods of collecting unpaid support arrearage, as long as the debtor strictly follows a number of steps—most importantly, starts making the regular support payments right away, arranges to pay the arrearage in full through the Chapter 13 plan, and actually pays everything as proposed.

4. Taxes:

Taxing authorities can:

  • start or finish a tax audit
  • can send you a notice that you owe taxes
  • can demand that you file your tax returns
  • can assess your taxes and send a demand that you pay them (but do no more)
  • in very limited situations can even file a tax lien

To emphasize, the automatic stay stops almost all actions against you by almost all creditors. But if you are involved in any court proceeding or collection efforts by the criminal or taxing authorities, or by an ex-spouse or support enforcement agency, you need to be especially familiar with these exceptions. 

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Another 5 Big Ways Chapter 13 Can Save Your Home

Last week’s blog gave you 5 important ways Chapter 13 can save your home. Here are 5 more. You won’t ever need all of them, but together they cover a lot of scenarios.

 

6. Get lots more time to sell your home.

If you need to sell your home but are now or expect soon to be under threat of foreclosure, Chapter 13 usually gives you much more time to sell than would a Chapter 7 filing. That means you’d have more market exposure, which gives you a better chance at selling at a better price. That’s especially true if you are being forced to sell during a traditionally slower time of the year, or are trying to sell on a short sale (in which the house is worth less than the amount of the mortgage(s) against it).

If you are behind on your mortgage payments and have a foreclosure scheduled, filing a Chapter 7 case will usually only buy you an extra three months or so, or less if the creditor decides it wants to hurry the process. Often the only way to stop a foreclosure without filing under Chapter 13 is by paying the entire arrearage of payments—as well as late charges, foreclosure fees and attorney fees—all in a lump sum. This can easily total tens of thousands of dollars. Instead, in a Chapter 13 case you can usually stay in the home by making your regular monthly mortgage payments plus some progress towards paying the arrearage. If there is enough equity in the property, all the arrearage can often just be paid from the proceeds of the anticipated sale.

7. Deal effectively with child/spousal support liens against your home.

Chapter 7 does nothing to stop collection efforts against you if you are behind on your child or spousal support obligations, which can affect your home in two ways.

First, support obligations usually turn into liens against the real estate you own, including your home. This gives your ex-spouse the ability to force the sale of your home to pay the support arrearage. If a lien for unpaid support was already attached to your home before your bankruptcy is filed, then Chapter 13 would stop the execution of that lien as long as you comply with your Chapter 13 plan. Your plan must show how you are going to pay that arrearage before your case is completed, and you must stay current on those Plan obligations. But as long as you do all this, the support lien cannot be executed against your home. Instead after the underlying support debt is paid off, the lien will be released, with no further risk to your home.

Second, if not support lien has been placed on your home, Chapter 13 would prevent that from happening. Instead you’d have the opportunity to pay off the support debt while under bankruptcy protection, avoiding a lien from ever being placed.

8. More effectively address an income tax lien on a dischargeable tax debt.

If you owe an income tax upon which the tax lien has been recorded against your home, but the underlying tax can be discharged—because it is old enough and meets the other conditions for a dischargeable tax debt—then dealing with the lien is likely better under Chapter 13. Depending on the amount of equity you have in your home, under Chapter 7 the IRS or other taxing authorities may well not release the tax lien even after the underlying tax debt is discharged. In a Chapter 13 case, in contrast, there is an established mechanism for determining the value of that lien, and for paying it, so that at the completion of your case the tax debt is discharged and its lien is satisfied.

9. Property tax arrearages are also handled well under Chapter 13.

Usually, your mortgage requires you to be current on your property taxes, giving your mortgage lender another reason to foreclose if you are not. Your Chapter 13 Plan will demonstrate how you will pay off your property tax arrearage, so as long as you comply with your Plan obligations you will eventually catch up on your property taxes. Besides stopping any threat of tax foreclosure itself, your Chapter 13 case also stops your mortgage lender from arguing that you are in breach of your requirement to stay current on the taxes.

10. Prevent a Chapter 7 trustee from taking your home if has more value/equity than the applicable homestead exemption.

If you have more equity in your home than the homestead exemption allows, you risk losing your home in a Chapter 7 case. That risk is greater than usual now because the irregular housing market makes property values difficult to predict accurately. Also, Chapter 7 trustees have a lot of discretion, and so predicting how aggressive yours will be is difficult.

In contrast, Chapter 13 provides a much more predictable procedure for determining the value of a home, and a mechanism to protect the value of the home in excess of the homestead, if any. 

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5 Big Ways Chapter 13 Can Save Your Home

Chapter 13 is known as the home-saver. It provides a set of tools, each of which solves a different problem. It’s a powerful combination.

 

Here are five of those tools:

1. Catch up on your mortgage arrearage, while protected and with flexibility.

You have the length of your Chapter 13 plan–as long as 5 years—to pay your mortgage back payments. During this entire repayment period, you are protected from foreclosure and most other collection efforts, as long as you follow the terms of the court-approved plan.  If you do follow your plan, you will be current on your home when you finish your case.

2. “Strip off” junior mortgages.

If your home is worth no more than the amount of your first mortgage, then a second mortgage can be “stripped” of its lien against your home. This means that you would no longer need to make the monthly second mortgage payments, thereby significantly reducing the monthly cost to keep your home. The second mortgage debt is treated in your Chapter 13 case like a “general unsecured creditor,” meaning that the second mortgage balance is paid only as much as you can afford to pay. Whatever portion of that balance that is not paid during your case is written off at the end of it.

3. Prevent income tax liens from being recorded on your home.

Both Chapter 7 and Chapter 13 prevent federal and other income tax liens from attaching to your home while the cases are open. But Chapter 7’s protection lasts only a few months, with a tax lien able to be imposed against your home just as soon as the Chapter 7 case is over, usually only about three months later. This gives the IRS or other taxing authorities much additional leverage against you, and puts your house in jeopardy.

If instead you file a Chapter 13 case before a tax lien is recorded, there won’t ever be such a lien against your home. Instead this tax would be paid off in your Chapter 13 case as a “priority creditor” while the IRS/state could not record a tax lien throughout the process.

4. Satisfy income tax liens, and clear them off your title.

If at the time of your Chapter 13 case, your home already has an unpaid income tax lien against it, the IRS/state will be stopped from acting on that lien. Assuming that lien was imposed for a tax that cannot be written off in bankruptcy, Chapter 13 both provides you a mechanism to pay these inescapable debts on a reasonable timetable and also protects you while you do so.

5. Slash other debt obligations.

Chapter 13 reduces what you must pay on your other debt obligations. As a result, you would be more able to afford your mortgage obligations.

Chapter 13 can surprisingly give you more room in your budget to pay towards your home than if you had filed a Chapter 7 case. That’s because if you owe certain kinds of debts that would not be written off in a Chapter 7 case—such as an ongoing vehicle loan, certain taxes, child or spousal support arrears, and most student loans—Chapter 13 could well allow you to pay less each month on those obligations, leaving more for the home.

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Why STATE Property Exemption Laws Can Be Used in FEDERAL Bankruptcies

The U.S. Constitution makes bankruptcy a federal procedure. So how come it’s different in every state because of the property you can protect?

The Constitution makes it sound like a bankruptcy case should be the same in every state. It says that Congress has the power “to establish… uniform Laws on the subject of Bankruptcies throughout the United States.” Article 1, Section 8, Clause 4.

But bankruptcies don’t sound like they are governed by “uniform Laws” if the residents of one state get to exempt (protect) way more of what they own than residents of another state. For example, you can exempt only $5,000 of value in your home if you live in Mobile, Alabama (Ala. Code Sect. 6-10-2), but if you live an hour’s drive to the east on I-10 in Pensacola, Florida, you can exempt an unlimited amount of value in your home (Art. X, Sect. 4, Fla. Const.).

How can the supposedly “uniform” bankruptcy laws be applied so differently in different states?

A Compromise

The reason is that the current law—created in the late 1970s—is a major political compromise involving the most basic tension in the Constitution– states’ rights versus federal power. (Remember, we fought the Civil War about this.)

The issue here is whether a federal set of property exemptions would be required for everyone throughout the country filing bankruptcy, or whether instead each state would be able to create its own separate exemptions to be applied to their residents filing bankruptcy. The compromise—quite firmly in favor of states’ rights—is that the Bankruptcy Code does contain a federal set of exemptions, but each state is allowed to “opt-out” of those federal exemptions and require its residents to use that state’s exemptions when filing bankruptcy.  

So, if you live in one of 32 states, you cannot use the federal exemptions. Instead you must use your state’s separate set of exemptions. In the remaining 18 states and the District of Columbia, you can use either the federal or local exemptions.

A Long Time Coming

Before this was settled, it was probably the most contentious issue in bankruptcy law. In fact, it’s a big part of why we didn’t even HAVE a bankruptcy law during most of the 1800s.

Throughout that century, an ongoing political and economic fight raged between bankers mostly in the Northeast against farmers and small merchants mostly in the South and West. Because of regular cycles of financial “panics,” the farmers and merchants endured a pattern of losing their homes and farms to out-of-state creditors. Because of this, the first law exempting certain property from creditors was adopted in 1839 in Texas even before it became a state. From this exemption laws spread quickly through the South and the Midwest during the 1840s and 1850s.

Three different times during this same century, Congress passed a set of bankruptcy laws, each time to address the fallout from one of the reoccurring financial panics. But none of the bankruptcy laws stayed in force for long, expiring or being repealed as soon as the economy improved. With no federal bankruptcy law in effect most of the time, various kinds of state laws tried to fill the gap in various ways, including through property exemptions.

The first “permanent” bankruptcy law was passed in 1898, but it could only muster enough votes in Congress by letting states continue to use their own system of exemptions for bankruptcies filed by their residents.

So our latest late-1970s compromise was a long time coming. Some in Congress wanted to continue using state exemptions as in the 1898 law, while others wanted a mandatory uniform federal system.  The compromise was that each state was given a choice: it could let its residents file bankruptcy using EITHER a new set of federal exemptions or the state’s exemptions, OR each state could require its residents to use the state’s exemptions.

The end result is that in every state’s residents are either allowed or required to use their state’s exemptions, while in 18 states residents also have the option to use the federal exemptions. Between states’ rights and federal power, it sure looks like this favors states’ right. The result is that bankruptcies can look quite different from one state to another, in spite of the “uniform Laws” requirement in the Constitution. That’s certainly true if you own a home with a sizeable amount of equity on one side of the Alabama-Florida border versus the other.   

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Qualifying for Chapter 13

Chapter 13 sometimes gives you huge advantages over Chapter 7. So how do you qualify for those advantages?  

 

You can file a Chapter 13 case if:

  • the amount of your debts does not exceed the legal debt limits
  • you are “an individual with regular income”

Debt Limits

Under Chapter 7 there is no limit how much debt you can have. But under Chapter 13 there are maximums for both secured and unsecured debts.

Debt limits were imposed back in the late 1970s when the modern Chapter 13 procedure was created.  Congress wanted to restrict this new, relatively streamlined option to simpler situations. With a very large debt amount, the more elaborate Chapter 11 was instead considered appropriate.   

The original debt limits were $350,000 of secured debts and $100,000 of unsecured debts. In the mid-1990s these limits were raised to $750,000 and $250,000 respectively, with automatic inflation adjustments to be made every 3 years thereafter. The most recent of these adjustments applied to cases filed starting April 1, 2013, with a secured debt limit of $1,149,525 and unsecured debt limit of $383,175. These limits apply whether the Chapter 13 case is filed by an individual or a married couple—they are NOT doubled or increased for a married couple. Reaching EITHER of the two limits disqualifies you from Chapter 13.

These limits may sound high, and indeed do not get in the way of most people who want to file a Chapter 13 case. But they can cause problems unexpectedly. As just one example, a serious medical emergency or medical condition that is either uninsured or exceeds insurance coverage can climb to a few hundred thousand dollars of debt shockingly fast.

“Individual with Regular Income”

First, only “individuals”—human beings, not corporations or partnerships—can file a Chapter 13 case.

Second, an “individual with regular income” is defined in the Bankruptcy Code as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.” 

If that doesn’t sound very helpful to you, you’re not alone. How “stable and regular” does a debtor’s income need to be before it is “sufficiently” so, in that it enables the debtor to make plan payments?  How is a bankruptcy judge going to make that determination at the beginning of the Chapter 13 case, especially if there hadn’t yet been any history of income from its intended source?

Having such a ambiguous definition gives bankruptcy judges a great deal of leeway about how they read this qualification. Most are pretty flexible at least at the beginning of the case, giving debtors a chance to make the plan payments, thereby proving by action that their income is “stable and regular” enough. But if your income has been inconsistent, you may need to persuade the judge that your income is steady enough to qualify. A good attorney, especially one who has experience with your judge, can present your circumstances in the best light and get you over this hurdle. 

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Setting the Record Straight About Whether You Can File a Chapter 7 “Straight Bankruptcy” Case

5 realities about whether you qualify under Chapter 7.

 

One of the biggest areas of confusion about bankruptcy is whether or not you qualify to file a Chapter 7 case.

If it’s the right tool for you, the odds are very high that you quality. The following five points get right to the heart of what you need to know.

1. Bad Publicity

Many people think that qualifying for “straight bankruptcy” is hard. Their attitudes range anywhere from a vague feeling to a firm conviction about this. From my countless conversations with new clients, I believe this impression is left over from a major overhaul of the Bankruptcy Code more than 7 years ago. That “reform,” which arose from a notion that too many bankruptcies were being filed, was indeed loudly trumpeted as promoting “Bankruptcy Abuse Prevention” by making it harder to file bankruptcy, especially under Chapter 7.

That quite clearly was in fact the intention of the law’s promoters. But for the vast majority of people for whom Chapter 7 is the best option, they continue to qualify for it.

2. The Confusing “Reform” Has Prolonged the Misinformation

The “Bankruptcy Abuse Prevention” Act dumped an astoundingly difficult to understand set of changes onto the Bankruptcy Code. In fact, parts are downright impossible to understand because they are directly contradicted by other parts. So bankruptcy judges and appeals judges all the way up to the U.S. Supreme Court have been scratching their heads trying to make sense of the insensible. Sorting out the layers of statutory contradictions and ambiguities through the court system takes many, many years. In the meantime, not surprisingly different courts looking at the exact same gibberish arrive at different rulings. If it’s difficult for high judges to make any sense of these laws, it’s only natural for ordinary people to have misimpressions about it. In this environment it’s easy to see how a concern about qualifying to file under this now not-so-new law still gets blown way out of proportion.

3. Most Can “Skip” the “Means Test”

Parts of the “means test”–the major mechanism now for qualifying under Chapter 7—are mind-numbingly confusing, but many people can avoid all that simply by virtue of their income. Without getting into the calculations here, basically if your “income” (as specially defined for this purpose) before filing was no more than the published median income amount for your state and size of family, then you qualify for Chapter 7 without needing to go through any more of the  “means test.”

Also, certain kinds of folks can skip the “means test” no matter the amount of their income, specifically present or recent business owners who have more business debt than consumer debt.

4. Passing the “Means Test” Can Be Easy

Even if you are a consumer debtor whose “income” IS higher than the applicable median income amount, through some creative but perfectly legitimate timing strategies you may well be able to lower your “income” to bring it under the applicable median amount.

And even if that’s not possible, you can often fly through the “means test” by subtracting appropriate expenses from your income to show you have either no “disposable income” or not enough to cause a problem. Either way, you qualify for Chapter 7.

5. Chapter 13 is Sometimes the Better Option

The purpose of the “means test” is to make people who have the “means” pay back some of their debts through a Chapter 13 case. In the relatively few times that a person does not qualify under Chapter 7 and so has to do a Chapter 13 case, usually the amount that must be paid in the Chapter 13 case to the creditors is much less than the total debt, making it not such a bad deal. Also, often when a person does not qualify under Chapter 7, Chapter 13 may have been the better choice anyway. It’s not unusual that a person who “just wants to file Chapter 7 and get it over with” learns that Chapter 13 comes with surprising advantages, making it the debtor’s first choice regardless whether the person would or would not pass the “means test.”

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Choosing Between Filing Chapter 7 and 13–Easy or Not?

Chapter 7 and 13 are very different debt-fighting tools. But that doesn’t necessarily mean it’s obvious which is right for you.

 

The Not Always So Easy Choice

Once it is clear that you need bankruptcy relief, picking the right Chapter to file can be simple. Your circumstances may all point towards one option or the other. But sometimes it can be a very delicate choice, with advantages and disadvantages that have to be carefully weighed.

And sometimes what at first seems to have been an obvious choice is not once all of the facts of your case are put on the table. Appearances can be deceiving. Your situation can turn out to have a twist or two that turns your case towards the Chapter you weren’t expecting. 

The unexpected twist is usually either a surprising advantage to filing under the Chapter you had not intended to file, or a surprising disadvantage to filing under the Chapter you had intended to file.

The First Impression IS Often Right

To be clear, when my clients first come in to see me, many have a good idea whether they want to file a Chapter 7 or a 13.  There is lots of information available about this, including on this website. So lots of my clients come in having done some homework. Or at least they’ve heard something about the two Chapters and have an impression which makes sense to them. And much of the time, their initial impression ends up being the right choice. 

But it Can Also be Wrong

Initial notions about what kind of bankruptcy you should file are often wrong because of advantages and disadvantages you had no idea about which end up being game-changers.

The simple fact is that bankruptcy law can be maddeningly complicated. Although the main differences between Chapter 7 and Chapter 13 can be summarized in a few sentences, there are in fact dozens of more subtle but often crucial differences. Many of them do not matter in most situations, but sometimes one or two of those differences can swing the decision strongly in a new direction. Without a thorough review of your case by an experienced bankruptcy attorney, you CAN end up filing under the wrong Chapter, and ending up paying the consequences for many years.

An Illustration

Let’s say you have a home you’ve been struggling to hold onto for the last year or two, but by now have pretty much decided it wasn’t worth doing so any more. You’re seriously behind on both the first and the second mortgages. Like so many other people, the home is worth a lot less than you owe. In fact, let’s say you owe on the first mortgage a little more than what the home is worth, plus another $75,000 on the second mortgage, so the home is “under water” by that amount. Although for the last couple of years you’ve been hoping that the market value will start heading back up, but it’s just held steady. You and your family would definitely like to stay there, buy you absolutely can’t pay both mortgages. Besides it makes little economic sense to keep struggling to hang onto property worth $75,000 less than what you owe. So you’ve decided it’s time to give up on the home, and just file a Chapter 7 bankruptcy.

But then you meet with your bankruptcy attorney and find out some surprising good news. Because your home is worth less than the balance on the first mortgage, through a Chapter 13 case you can “strip” the second mortgage off the title of your home. You no longer have to make the monthly payments on it, making keeping your home all of a sudden hundreds of dollars cheaper each month.  In return for paying into your Chapter 13 Plan a designated amount each month based on your budget, and doing so for the three-to-five year length of your Chapter 13 case, you can keep your home usually by paying very little—and sometimes nothing—on that $75,000 second mortgage. At the end of your case, whatever amount is left unpaid on that second mortgages would be “discharged”—legally written-off—so you own the home without that mortgage. You are debt-free, other than your first mortgage. 

This “stripping” of the second mortgage is NOT available under the Chapter 7 that you initially thought you should file. The ability to keep your home by significantly lowering its monthly cost to you and bringing the debt against it much closer to its value could well swing your choice towards filing Chapter 13, contrary to your initial intention.

Meet with Your Attorney with an Open Mind

This is just one example of countless ways that the Chapter you initially thought was the right one might not be. So be sure to keep an open mind about your options when you first consult with your attorney. Do tell him or her your goals, and say why you think one Chapter sounds better to you than the other. In the end, after laying out your story and hearing the attorney’s advice, it is ultimately your choice. But do yourself a favor and be flexible, because you might possibly get better news than you expected when you first walked in.

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Can You File Bankruptcy If You Are Not a U.S. Citizen?

The simple answer is yes, you may file bankruptcy in the United States regardless of your citizenship status.

 

Who May Be a “Debtor” in Bankruptcy Court?

The Bankruptcy Code places no citizenship limits on who may file bankruptcy. Section 109(a) states that “only a person that resides or has a domicile, a place of business, or property in the United States… may be a debtor… .” for filing bankruptcy.  “Person” is simply defined to include an “individual” (as well as a “partnership and corporation”). So there is no requirement about needing to be a citizen, or even to being legally in the country. So everyone, citizen or not, legal or not, can file bankruptcy.

Have a “Domicile… in the United States”

To have a “domicile” simply means being physically present in one location with the intention of making that place your present home. Generally the longer you has been in one place and the more you have put down roots—such as signing an apartment rental agreement, getting a state driver’s license—the easier to show that you’ve established a domicile.

Have “Property in the United States”

If you have any meaningful amount of property–a bank account or other kinds of financial accounts, a vehicle, personal possessions—that alone appears to be enough to qualify as a debtor.

Practical Requirements

The bankruptcy filing documents ask for a Social Security number, although the Bankruptcy Code does not explicitly require it. If you have a valid Social Security number appropriately issued by the Social Security Administration, use it. Otherwise, get an Individual Taxpayer Identification Number (“ITIN”) from the IRS, and use that. The “IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs.”

You will also need to show proof of your identity at the Meeting of Creditors about a month after your case is filed. The reason for this is for the bankruptcy trustee to be able to verify that you—the person answering the questions under oath–is a real person, the one who filed the bankruptcy documents. This is intended to prevent identity frauds of the bankruptcy system. Proof of identity usually requires two documents: one showing your SSN or ITIN—such as the original Social Security card it that’s available, or some other paper received from the government or from an employer showing the number; plus 2) some form of photo identification—such as a driver’s license or passport. 

 

If you are not a citizen but meet these conditions, you can file for bankruptcy. 

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Chapter 7 Bankruptcy Only Buys You Limited Extra Time for Your Home, But It May Be Enough for What You Need

Are you facing a foreclosure sale, aren’t fighting it, but just need more time to move? Or you are on the brink of a sale and need just another month or two to close?

 

Chapter 13 is Often the Better Option for Holding onto Your Home

If you are seriously behind on your mortgage, and you want to keep the home, Chapter 13 is often the way to go. Or if you have a second mortgage, or a tax lien, or child/spousal support lien against your home, Chapter 13 can also be very helpful. It comes with a variety of legal tools that can make it possible to keep your home when it would otherwise be impossible or extremely difficult.

When Chapter 7 is Enough

But you may not need those extra legal tools of Chapter 13, either because you are surrendering the house soon anyway, or because you only need a modest amount of help to be able to keep the house. Chapter 13 can be great, but there’s no point to entering into a three-to-five year payment plan if a Chapter 7 “straight” bankruptcy would give you just the amount of help with your house that you need.

When You Are Surrendering Your House

If you are on the brink of a foreclosure sale, the filing of a Chapter 7 case stops that foreclosure just as quickly as would a Chapter 13 filing. If you just need to buy a relatively short amount of time—a matter of a few weeks or a couple months—Chapter 7 case could be enough.

This can be a sensible solution if you’ve decided to leave the house behind, but need a little more time to pull together the money to make the move. Or you may need a couple more months before your kids’ school year is over, or are waiting for your next housing to become available. In these situations, Chapter 7 could well be the ticket.

When You Are Selling Your House

If you are on the brink of closing a sale of your house, including a short sale, you can file a Chapter 7 case to stop an approaching foreclosure. This can buy some time, but be aware it can complicate things as well. Your bankruptcy trustee will then have some say about what happens to your property, although that should not be a problem if you have no equity or what you have is protected by the homestead exemption. A bankruptcy filing can spook your buyer, so you or your attorney should likely communicate what you are doing and give the appropriate reassurances.

Stopping Other Kinds of Foreclosures

A Chapter 7 filing stops not only foreclosures by your mortgage lender, but also by the county tax assessor for unpaid property taxes, by the IRS on tax liens, by ex-spouses on support liens, or creditors who sued you and got a judgment lien attached to your house. But remember again that this protection only lasts a few months, or even shorter if the creditor is aggressive. But in the right situation it may be enough time either to discharge (write off) the underlying debt—such as with a credit card debt resulting in a judgment lien—or to make payment arrangements with creditors on debts that do not get discharged—such as with the IRS or support enforcement.

Stopping Liens from Attaching to Your Home

Filing a Chapter 7 can also prevent—again at least temporarily—most kinds of liens from attaching to your home. If it is a debt that is going to be discharged in your Chapter 7 case, stopping the lien could make a difference of tens of thousands of dollars.

For example, if you had equity in your home and owed the IRS a substantial amount of income taxes from a number of years ago, the IRS could record a tax lien against your home. If you filed a Chapter 7 case before that were to happen, you may be able to discharge the tax debt (if it meets certain conditions) and be allowed to keep the equity in your home through the homestead exemption. But if you delayed filing the Chapter 7 case until after the IRS filed a tax lien, you would likely have to pay that debt out of the equity in the house (because the homestead exemption does not protect against tax liens).

How Much Time Does a Chapter 7 Buy?

The answer to this question is unfortunately unclear, mostly because it depends on how aggressively your mortgage lender reacts. If it is very aggressive, you may not gain more than a month or so. If it is not, you may gain the three or so months that it takes a simple Chapter 7 case to complete, or even more time. Your attorney may be able to give you a better idea based on the behavior of your creditor in previous cases. 

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Keep Your Vehicle with More Time to Catch Up and a Lower Monthly Payment

What can you do if you MUST keep your car or truck, but can’t afford the monthly payments?

Or if you fell behind and just can’t catch up?

Chapter 7

A regular bankruptcy”—Chapter 7—won’t usually help in these situations.

It would only help if writing off your other debts results in you able to do ALL of the following:

1) catch up on any missed payments within a month or two of filing the bankruptcy,

2) start making the regular monthly payment on time by the next due date, AND

3) consistently pay on time all the rest of the monthly payments on the contract.

Most vehicle loan lenders—especially the major national ones—are just not flexible about any of this. If you do not have the means to catch up on any missed payments fast enough, you will generally not be allowed to keep the vehicle. If during the Chapter 7 case itself you don’t make the regular monthly payments on time, the lender may well ask the bankruptcy court for permission to repossess your vehicle even before the case is completed. And even if you get past all that, some of these lenders are quicker to repossess if you are late with payments any time down the line.

As far as lowering the payments or changing any of the other terms of the contract, very few vehicle lenders will even consider doing that.

Chapter 13

So, if you can’t meet these payment hurdles, but you have no choice but to hang on to your vehicle to commute to your job or to meet other family responsibilities, the other kind of consumer bankruptcy, Chapter 13, is worth seriously considering.

It can help two ways:

1) almost always it can give you more time to catch up if you’re behind; and

2) under certain conditions a Chapter 13 case can also—through a “cram down”—reduce your monthly vehicle payments, likely lower your interest rate, and shrink the total amount you need to pay on the loan.

Lots More Time to “Cure the Arrearage”

Instead of being stuck with catching up on any missed payments in a matter of weeks (as under Chapter 7), Chapter 13 often gives you many months or even a few years to bring your account current. A portion of your plan payments would go towards your arrearage. Generally, as long as you consistently make your plan payments and your regular monthly vehicle payments (usually also included in the plan payment) on time, and keep up on your insurance, your lender has to allow you to do this. 

 “Cram Down”

Under some conditions, you will be able to keep your vehicle without needing to make up any missed payments. Through a “cram down,” the amount you must pay for your vehicle is reduced to the value of the vehicle. The interest rate is often reduced, the length of the loan is often extended, all of which usually result in a reduced monthly payment, often significantly so.

“Cram down” only makes sense when—as is very often but not always the case—your vehicle is worth less than what you owe on it.

Bankruptcy law only allows a “cram down” if you got your vehicle loan at least two and a half years before filing your Chapter 13 case—910 days, to be precise.

Conclusion

Chapter 13 provides some extremely valuable tools enabling you to keep your vehicle. This may or may not justify filing under Chapter 13 instead of Chapter 7, but it sure means that it’s an option worth exploring with your attorney.

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