What Happens to Most of Your Debts under Chapter 13 “Adjustment of Debts”?

In most Chapter 7 “straight bankruptcy” cases most debts are written off, so what happens to them in a Chapter 13 “adjustment of debts”?

 

The Advantages and Disadvantages of Chapter 13

Chapter 13 comes with many, many tools not available under Chapter 7. Many of these tools are helpful particularly if you have special debts or issues not deal with well in a Chapter 7 case—if you are behind on your mortgage, vehicle loan, or child support, if you owe income or property taxes, or if you have non-exempt (unprotected) assets you want to keep.

But these advantages come with what can be a significant disadvantage: you would usually have to pay something on your “general unsecured” debts—your run-of-the-mill ones without any collateral. That’s instead of paying nothing, as you likely would in a Chapter 7 case.

In some rare Chapter 13 cases you have to pay your “general unsecured” creditors in full—a so-called 100% plan. But on the other extreme, you may not have to pay those creditors anything—a 0% plan. Most of the time you have to pay them something, but often very little—only a few cents on the dollar.

How Much Do You Need to Pay Your “General Unsecured” Debts?

You must pay these debts whatever money is left over and available based on your budget after paying certain secured debts (home mortgage and vehicle arrearage, for example) and “priority” debts (recent income taxes, for example). So how much you have to pay on the debts that in a Chapter 7 case would be just discharged (written off without any payment) depends on your income, allowed expenses, and other debts, and sometimes also on the value of assets that you are trying to protect.

Here is a list of considerations in greater detail about how this works under Chapter 13.

1. Debts that are legally the same are treated the same. So, in a Chapter 13 plan all “general unsecured” debts are paid the same percent of the debt as are other “general unsecured” debts.

2. For any creditor to get paid anything out of what you are paying into a Chapter 13 plan, it has to file a “proof of claim”—stating the amount and nature of the debt—with the bankruptcy court, and do so by the stated deadline. If a creditor with a “general unsecured” debt does not file a “proof of claim” it will receive nothing through the plan. The debt will then be discharged at the end of the completed case.

3. If, as is often the case, other creditors do not file proofs of claim that usually, but not always, means more money available for the other creditors.

4. “0% plans” are those in which all of the money paid by the debtor into the plan is earmarked to pay secured and “priority” debts, plus trustee and attorney fees, leaving nothing for the “general unsecured” ones. Some bankruptcy courts frown on “0% plans,” either in general or especially when there does not seem to be good reason to be in a Chapter 13 case instead of a Chapter 7 one.

5. “100% plans” are those in which all of the “general unsecured” debts are paid in full through the plan. These happen mostly for two reasons. The debtors:

a. have enough disposable income (income minus allowed expenses) over the course of the case to pay off their debts in full; or

b. own more non-exempt assets which they are protecting through their Chapter 13 case than they have debts, requiring them to pay off their debts in full in order to keep those assets.

6. How much “general unsecured” debts are paid depends in part on how long the debtors are required to pay into their Chapter 13 case. Generally, if debtors’ pre-filing income is less than the published “median income” for their applicable state and family size, then they pay for 3 years into their plan. If their income is more than that amount, they must pay for 5 years instead.

7. Payments on “general unsecured” debts can also be affected by changes that happen during the case, such as income increases or decreases affecting the monthly plan payment amount, and unexpected tax refunds and employee bonuses paid into the plan.

8. Once the “general unsecured” debts are paid whatever the Chapter 13 plan provides for them (and the rest of the plan requirements are met), the remaining balances of those debts are discharged.

 

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Chapter 13 Can Especially Protect Your Co-Signers

Chapter 13 “adjustment of debts” goes a big step further than a Chapter 7 case by protecting your co-signers and their assets.

 

The Regular “Automatic Stay”

The automatic stay—your protection against just about all collection efforts by your creditors—kicks in just as soon as your bankruptcy case is filed. It applies to all bankruptcy cases, including those filed under Chapter 7 and Chapter 13. It is one of the most powerful and important benefits of filing a bankruptcy case.

But it protects only you—the person or persons filing bankruptcy—and your assets. It does not protect anybody else who may also be legally liable on one of your debts.

The Very Special “Co-Debtor Stay”

The very first section of Chapter 13—Section 1301—also deals with the automatic stay, but adds another layer of protection—applicable to your “co-debtors, or co-signers—that only applies to cases filed under Chapter 13.

Section 1301 states that once a Chapter 13 case is filed, “a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any other individual that is liable on such debt with the debtor.” (Emphasis added.)

A creditor on a consumer debt is already prevented by the regular automatic stay from doing anything to collect a debt directly from the debtor. Now, under Chapter 13 only, and only on consumer debts, that creditor is also prevented from collecting on the same debt from anybody else who has co-signed or is otherwise also obligated to pay that debt.

A Very Special Protection

If you think about it, that’s rather powerful, and quite unusual. The person being protected—your co-signer—has nothing to do with your bankruptcy case filing. The co-debtor stay gives you the power to protect that person—likely somebody you really care about—who is not filing bankruptcy and so is not under the direct jurisdiction of the court. The person may not even know that you are protecting them from the creditor.

Conditions and Limits of the Co-Debtor Stay

Besides being limited to consumer (not business) debts, the “co-debtor” protection:

1. Does not protect spouses from joint liability on income taxes. That’s because income tax debts are not considered “consumer debts” for this purpose.

2. This protection does not extend to those who “became liable on… such debt in the ordinary course of such individual’s business.”

3. Creditors can ask for and get permission to pursue your co-debtor to the extent that:

(a)  the co-debtor had received the benefit of the loan or whatever “consideration” was provided by the creditor (instead of the person filing the bankruptcy)—in effect that you were co-signing for him or her; or  

(b)  the Chapter 13 plan “proposes not to pay such claim.”

4. Even if a creditor does not seek or get the above permission, this co-debtor stay expires as soon as the Chapter 13 case is completed, or if it’s dismissed (for failure to make the plan payments, for example), or converted into a Chapter 7 case.

Conclusion

Choosing between Chapter 7 and 13 often involves weighing a series of considerations. If you want to protect a co-signer or someone liable on a debt with you from being pursued for that debt, seriously consider Chapter 13 because of the co-debtor stay. 

 

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Major Advantages of Chapter 13 “Adjustment of Debts”

Chapter 7 “straight bankruptcy” is quick and often gives you what you need. But in many situations, Chapter 13 gives you SO much more.

 

The last blog post showed how a simple Chapter 13 case works. That example illustrated one of the special advantages you get with Chapter 13: if you have a debt which can’t be discharged (legally written off) in a regular Chapter 7 case—such as a recent IRS income tax debt or back child support—these kinds of special debts can be conveniently paid over time through a Chapter 13 payment plan. The crucial advantage here is that throughout the 3-to-5-year plan such creditors can’t take any collection action against you or your assets.

That’s just the first major way that Chapter 13 buys time and protection that Chapter 7 simply cannot provide. Here are some of the other main advantages of Chapter 13:

1. You can keep your possessions that are not protected by property “exemptions,” preventing a Chapter 7 trustee from taking them from you. Thus you retain much more control over the process of saving your assets, avoiding the unknowns of negotiating payment terms with a Chapter 7 trustee in order to keep your non-exempt possessions. Also, in a Chapter 13 case, you have 3 to 5 years to pay to protect such possessions, instead of the few months that Chapter 7 trustees generally allow.

2. Similarly, if you fell behind in payments on your home’s first mortgage, you have the length of your plan—the same 3 to 5 years–to catch up. That’s in contrast to the few months of payments that a mortgage lender would generally allow if you negotiated directly with it after filing a Chapter 7 case.

3. You may be able to “strip” a second (or third) mortgage from your home’s title, and avoid paying all or most of that mortgage. This can happen if the value of your home is less than the balance of your first mortgage. Mortgage “stripping” may save you hundreds of dollars per month and potentially many tens of thousands of dollars over time. This is completely unavailable in a Chapter 7 case.

4. You may be eligible for “cramdown” of your vehicle loan. If you purchased and financed your vehicle more than two and a half years before filing your Chapter 13 case, and the vehicle is worth less than the balance on the loan, your monthly payments and the total amount you pay for your vehicle can be significantly reduced. This could enable you to keep a car or truck that you couldn’t otherwise. In contrast, in a Chapter 7 straight bankruptcy case you are usually almost always stuck with the monthly payment and loan balance dictated by the vehicle loan contract.

5. In that same situation, if you are behind on the vehicle loan payments you don’t have to catch up those back payments. In a Chapter 7 case, almost always you must quickly pay off any arrearage if you want to keep the vehicle.

6. If you owe an ex-spouse non-support obligations, you can discharge (write-off) them under Chapter 13—not under Chapter 7. Non-support obligations include requirements in a divorce decree to pay off a joint marital debt or to pay the ex-spouse in return for getting more of the marital property. Discharging such debts can make a huge difference, often making Chapter 13 well worthwhile.

7. If you have any student loans, under Chapter 13 you could likely delay paying on them for three years or more. That can be especially helpful if you have some other debts that are essential to pay off during your case (like child support arrearage or recent income taxes). Also, if you have a worsening medical condition, you may be better situated to qualify for a “hardship discharge” of your student loans if you wait until later in your Chapter 13 case.

People often assume they need and want a regular Chapter 7 bankruptcy, and it’s often exactly what they do need. But the above short list gives you some idea of the benefits of Chapter 13 that may make it a much better option. That’s one of the reasons you should talk with an experienced bankruptcy attorney, and do so with an open mind. That’s because sometimes Chapter 13 can give you a huge unexpected advantage, or a series of smaller advantages, which may swing your decision in that direction. 

 

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What a Simple Chapter 13 Case Looks Like

The most common reason for a Chapter 13 “adjustment of debts” is if you have debts that can’t be written off in a “straight” Chapter 7 case.

 

When Chapter 7 Does Not Discharge Your Debts

My last blog post was about the discharge (legal write-off) of debts under Chapter 7. I concluded with the comment that if you have debts that Chapter 7 doesn’t discharge, Chapter 13 may be the way to go. It provides what is often the safest and most convenient method to deal with debts that you have to pay, while also discharging those debts that would be discharged under Chapter 7. The much longer time that Chapter 13 takes—3 to 5 years instead of as short as 3 to 4 months for most Chapter 7 cases—can be highly worthwhile under the right circumstances.

An Example

Let’s show you one example of the right circumstances. Imagine someone owing $7,000 in IRS debt for 2011 and 2012, $3,000 in back child support, $20,000 in credit cards, and $5,000 in medical bills. The person lost his or her job in late 2010 and used the situation to try to run a one-person business during 2011 and 2012. It made a little money but only barely enough to pay living expenses. There was absolutely no money available to set aside for income taxes. During that period the person also fell behind on child support payments. Then this person found a new job a few months ago that pays less than the one lost in 2010, but at least enough to pay ongoing taxes and support, in addition to living expenses. But the person’s budget leaves only about $400 to pay ALL debts, not nearly enough to pay the minimum amounts on the credit cards, much less anything towards the rest of the debts including the taxes and back support.

What Chapter 7 Would and Would NOT Accomplish

A regular Chapter 7 case would likely discharge the $20,000 in credit cards and the $5,000 in medical bills, but would leave owing the $7,000 to the IRS and the $3,000 in back support. Although discharging $25,000, the person would come out of bankruptcy still $10,000 in debt, owed to two creditors who can be extremely aggressive—the IRS and your ex-spouse or the local support enforcement agency.

Although the IRS might be willing to accept payments of $400 per month, there’s a good chance that your ex-spouse or the support enforcement agency would be able to garnish your wages for the back support, and that would negate any possible arrangement with the IRS. Plus the last thing this person would want at his or her new job is for the payroll office to get a garnishment order for back child support. A previously filed Chapter 7 case would have no power to stop that kind of garnishment.

What Chapter 13 Would Accomplish

In contrast Chapter 13 would be able to stop your ex-spouse or support agency from garnishing for back support—as well as from any action the IRS or any state taxing entity, or virtually any other creditor, could take.

So the person in our example would file a Chapter 13 case, start or continue paying any ongoing monthly child support payments, and would also be sure to have withheld an adequate amount for ongoing income taxes. Then his or her attorney would put together a plan to pay the Chapter 13 trustee $400 per month (based on what is available in his or her budget) for 36 months.

During that period of time neither the IRS, nor the support agency or ex-spouse, nor any other creditors would be able to take any action against the person or any of his or her assets as long as he or she complied with the Chapter 13 plan. That means that he or she kept up the $400 plan payments, and kept current on ongoing tax and support obligations (as provided for in the budget).

Over those three years the trustee would be paid $14,400 ($400 X 36 months), which would pay all the $3,000 in back support and the $7,000 in taxes—usually without any additional interest or penalties from the date of the filing of the Chapter 13 case. The Chapter 13 trustee would also get paid, usually about 5-to-10% of what is being paid into the plan, as would any attorney fees that weren’t paid to the attorney at the beginning of your case.  If there would be any money left over (little or none in this example), that would be divided pro rata among the credit card and medical debts. After the 36 months of payments, any remaining balances on those debts would be discharged. That would leave the person at the end of the Chapter 13 case owing nothing to anyone. The back taxes and support would have been paid off, and he or she would be current on any ongoing income taxes and child support.

So that’s what a simple Chapter 13 case would accomplish and would look like. 

 

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Keeping All that You Own by Filing a Chapter 13 Case

How does a Chapter 13 “adjustment of debts” protect what you may otherwise lose in a Chapter 7 “straight bankruptcy”?

 

Chapter 13 is often an excellent way to keep possessions that are not “exempt”—which are worth too much or have too much equity so that their value exceeds the allowed exemption, or that simply don’t fit within any available exemption.

Options Other Than Chapter 13

If you want to protect possessions which are not exempt, you may have some choices besides Chapter 13.

You could just go ahead and file a Chapter 7 case and surrender the non-exempt asset to the trustee. This may be a sensible choice if that asset is something you don’t really need, such as equipment or inventory from a business that you’ve closed.  Surrendering an asset under Chapter 7 may also make sense if you have “priority” debts that you want and need to be paid—such as recent income taxes or back child support—which the Chapter 7 trustee would pay with the proceeds of sale of your surrendered asset(s), ahead of the other debts.

There are also asset protection techniques—such as selling or encumbering those assets before filing the bankruptcy, or negotiating payment terms with the Chapter 7 trustee —which are delicate procedures beyond the scope of this blog post.

Chapter 13 Non-Exempt Asset Protection

If you have an asset that is not protected by an exemption which you really need or simply want to keep, by filing under Chapter 13 you can keep that asset by paying over time for the privilege of keeping it.  Your attorney simply calculates your Chapter 13 plan so that your creditors receive as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee.

For example, if you own a free and clear vehicle worth $3,000 more than the applicable exemption, you would pay that amount into your plan (in addition to amounts being paid to secured creditors such as back payments on your mortgage). You would have 3 to 5 years—the usual span of a Chapter 13 case—throughout which time you’d be protected from your creditors. Your asset-protection payments are spread out over this length of time, making it relatively easy and predictable to pay.

This is in contrast to negotiating with a Chapter 7 trustee to pay to keep an asset, in which you would usually have less time to pay it and less predictability as to how much you’d have to pay.

Chapter 7 vs. Chapter 13 Asset Protection

Whether the asset(s) that you are protecting is worth the additional time and expense of a Chapter 13 case depends on the importance of that asset, and other factors.

First note that people with assets to protect have other reasons to be in a Chapter 13 case, and the asset protection feature is just one more benefit.

Furthermore, in some Chapter 13s you can retain your non-exempt assets without paying anything more to your creditors than if you did not have any assets to protect. If you owe recent income taxes and/or back support payments (or any other special “priority” debts which must be paid in full in a Chapter 13 case), you can use these debts to your advantage. Since in a Chapter 7 case such “priority” debts would be paid in full before other creditors would receive any proceeds of the sale of any surrendered assets, if the amount of such “priority” debts are more than the asset value you are seeking to protect, you may well only need to pay enough into your Chapter 13 case to pay off these “priority” debts.

This way you would get an immediate solution—your assets protected right away and the IRS or other “priority” debt creditor off your back. And you’d have a long-term solution, too—your assets would be protected throughout the Chapter 13 case, and the IRS and/or other “priority” creditor would get paid off. Once your case is completed, you would be debt-free. 

 

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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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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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5 More Kinds of Chapter 13 Medicine for Saving Your Home

Chapter 13 is extraordinary in the number of distinct ways it can solve debt problems endangering your home. Here are five more ways beyond the five of the last blog.


6. Chapter 13 “super-discharge”: You can discharge (legally write off) some debts in a Chapter 13 case that you cannot in a Chapter 7 one. A couple of decades ago there were many more kinds of debts that could be discharged under Chapter 13, but Congress has whittled away at the list steadily. Now there are two left worth mentioning here. First, obligations arising out of divorce decrees dealing with the division of property and of debt (but NOT the part dealing with child/spousal support); and second, obligations involving “willful and malicious injury” to a person or property (but NOT related to driving while intoxicated). Both of these “super-discharged” types of debts are legally complicated, and definitely need to be addressed with the help of an experienced attorney. But in the right circumstances Chapter 13 can discharge one of your most serious debts, the same one that Chapter 7 would leave you owing.

7. Nondischargeable debts such as income taxes, back child/spousal support: Special debts which cannot be discharged in bankruptcy leave you at the mercy of those creditors just a few months after you file a Chapter 7 case. Those creditors—such as the IRS, and your ex-spouse and/or the state or local support enforcement authorities—often have the power to impose tax and support liens on your home, and potentially can even seize and sell your home to pay those liens. In contrast, a Chapter 13 protects you while you pay off those special debts in an organized plan, by preventing those liens from being placed on your home. By the time your Chapter 13 case is finished, those special debts are paid in full, never to threaten your home again.

8. “Statutory liens”: utility, ”mechanic’s”/”materialman’s,” and child support liens: If before filing bankruptcy you already have one of these involuntary liens imposed by law against your home, those liens would very likely survive a Chapter 7 bankruptcy. Because the “automatic stay” that prevents the enforcement of liens expires with the completion of a Chapter 7 case, these creditors would be able to threaten your home at that point. Instead, in a Chapter 13 the “automatic stay” continues throughout the three-to-five year case, again protecting your home while you satisfy the lien.

9. Judgment liens: Unlike the other nine items in this list, judgment liens can be avoided, or removed from your home’s title, in the same circumstances under Chapter 7 as in Chapter 13. A judgment lien can be removed if it “impairs” your homestead exemption, that is, if it encumbers the equity in your home that is protected by that exemption. The reason that I list it here is that this judgment lien avoidance can sometimes be put to extra good use in Chapter 13 when used in combination with one or more of these other 9, in a way which could not happen in Chapter 7. Let’s say for example that your home equity position would allow you to remove a judgment lien, but you are so far behind on your mortgage payments that you would lose your home to a foreclosure after finishing a Chapter 7 case. Your ability to remove that judgment lien from your home title would do you no good if you’re going to have your home foreclosed by your mortgage lender a few months later. It’s the Chapter 13’s ability to give you protected time to cure that mortgage arrears that gives practical value to your power to remove the judgment lien.

10. Preserve non-exempt equity: Home property values have declined so much in the last few years that most people thinking about bankruptcy do not have too much equity in their homes. That is, if there is any equity at all, it’s protected by the applicable homestead exemption, and therefore not at risk if you file a Chapter 7 case. But IF you DO have more value in your home than allowed under your homestead exemption, Chapter 13 can often protect it. You don’t run the risk of a Chapter 7 trustee seizing it to sell and pay the proceeds to your creditors. Instead, under Chapter 13 you can often either keep the home by paying those creditors gradually over the course of the up-to-5-year Chapter 13 case, or can sell the home yourself on your own schedule. Either way, Chapter 13 leaves you much more in control of the situation.

Each one of these ten Chapter 13 powers can solve a big problem so that you can keep your home. But they can have an especially dramatic impact when used in combination. In the next blog I’ll give some examples so that you see how these ten actually work, both separately and in combination.

 

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Save Your Home with 5 Powerful Prescriptions Found in Your Chapter 13 Medicine Cabinet

Chapter 13 is often your best option for holding onto your home. That may be simply because it solves one of your major home debt problems, or instead because it solves a bunch of them all in one package.

 

If you’ve heard that Chapter 13 bankruptcy—the three-to-five year plan for “adjustment of debts”—is a good way to save your home, you’re probably thinking of a particular problem that you heard it solves. But the true beauty of Chapter 13 is in how many different kinds of problems it can handle all at the same time. So even if your home is being attacked from multiple directions, this bankruptcy option can often successfully defend against all those attacks.

But don’t get the false impression that if you are in danger of losing your house, Chapter 13 can necessarily save it. Even with all of the different ways it can help, this type of bankruptcy has its limits. Your situation has to fit for it to work.

I have a list of ten distinct ways that Chapter 13 can save your home, five covered in this blog and then five in the next one. This list of ten will give you a good sense of the multiple powers of Chapter 13, but also some sense of their limits.

1. Stretch out mortgage arrearage payments: This is the one you likely hear about most often: reduce what it costs you each month to catch up on your back mortgage payments by using up to five years to do so. This is in contrast to the much shorter time you’d have to catch up—likely a year or less—on the back payments, and the much, much higher monthly payments you’d have to pay to do so, if you had instead filed a Chapter 7 case.

2. Junior mortgage strip: Through Chapter 13—but not Chapter 7—you can “strip” a second or third mortgage lien off your home title. This often saves you hundreds of dollars monthly that you could instead pay to other more crucial obligations—or to your living expenses. And in the long run it can often save you thousands or tens of thousands of dollars. Very importantly, getting rid of some of the debt on your home can either create equity in your home where you did not have any, or at least make it less underwater than it had been.

3. Flexibility in buying more time for your home: There are all kinds of situations in which you need to buy time for your home, but not just the straightforward one for catching up on the mortgage arrearage. If you need to stop your house from being foreclosed to have time to sell it, or if you want to delay selling your home until two years from now when a child graduates from a local school, or when you qualify for retirement or expect some other definite change in your finances, Chapter 13 can often give you more control of the situation. Instead of being under the protection of the bankruptcy court for only the three months or so of a Chapter 7 case, you can potentially be protected for years under Chapter 13. Mind you we would have to formulate a plan to keep the mortgage creditor happy during this time. But the point is that there may well be creative ways to meet your goals without just being at the mercy of your lender, as you would pretty much be after, or even sometimes during, a Chapter 7 case.

4. Property taxes: When you fall behind on mortgage payments, at the same time you can also fall behind on your property taxes. Not paying a property tax payment on time is usually a separate breach of your contract with your mortgage lender, giving it another reason to foreclose on the property. Chapter 13 provides an excellent way to catch up on those taxes, while at the same time preventing the lender from using your missed tax payment as a reason to foreclose in the meantime. And because interest on property taxes is often higher than other secured debts, in your Chapter 13 Plan you may well be able to save money by paying off this tax debt earlier than other obligations.

5. Income tax liens: While I’m talking about taxes, Chapter 13 is also often the best way to satisfy an income tax lien which has attached to the title of your home. IRS and other possible state tax liens are generally not shielded by a homestead exemption, and have to be paid even if the underlying tax would otherwise have been discharged in bankruptcy. After a Chapter 7 case, you are left to fend against the tax authority on your own, facing the potential seizure of your home, with that used as intense leverage against you. In contrast, in Chapter 13 you are protected from such seizure, and as with property taxes can generally earmark payments towards the tax lien before most other creditors so that it gets paid off. It’s a much less worrisome and sensible way of taking care of this kind of scary debt.

These are the first five powerful ways that Chapter 13 can solve debt problems involving your home. Please come back in a couple days for the other five.

 

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