Posts

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

Another Five Tremendous Tools to Save Your Home through Chapter 13

These additional 5 tools, especially in combination, can tackle and defeat your mortgage and other home-debt problems.

 

 In my last blog post, I gave you five huge ways that Chapter 13 can save your home. I’ll summarize those briefly here, and then give you and explain another five of them.

Here are the first five. Under Chapter 13 you can:

1. … stretch out payments for catching up on back mortgage payments, as much as five years.

2.   … cur or erase your other debt obligations so that you can afford your mortgage payments.

3. … prevent income tax liens, child and spousal support liens, and judgment liens from every attaching to your home.

4. … pay the debts that cannot be discharged (legally written off) in bankruptcy while being protected from those creditors putting liens on or enforcing liens against your home.

5. … get rid of debts owed to creditors which could otherwise put and enforce liens on your home.

And here are today’s additional five Chapter 13 benefits for your home:

6. … avoid paying all or some of your second (or third) mortgage.

This is the powerful “mortgage strip” that can save you hundreds of dollars a month and sometimes many tens of thousands of dollars over the time you live in your home.

If—and only if—the value of your home is no more than the balance of your first mortgage, your second mortgage can be treated as an unsecured creditor. If so, you can “strip” that second mortgage off the title of your home. This means you can stop making the monthly payments on it. The entire amount that you owe is added to your pool of other unsecured creditors, which are all paid only as much as you can afford to pay over the life of your three-to-five-year Chapter 13 case. And then at the end of the case whatever has not been paid is completely discharged at the end of the case.

Although property values have increased in the last couple of years, there are still millions of homes “under water”—owing more debt than they are worth—and many of these are worth less than their first mortgage.  If this applies to you, it may be reason enough to do a Chapter 13 case. You can usually end up paying only pennies on the dollar—or sometimes even nothing—on your second (or third) mortgage. This leaves your home both much easier to hang on to and much closer to not being “under water.”

7. … get more time to pay property tax arrearage, while protecting your home from both tax and mortgage foreclosure.

If you have fallen behind on your property taxes, this creates two problems. First, you risk losing your home to a property tax foreclosure by the county or whatever other governmental entity is collecting the tax. Second, since your mortgage lender requires you to keep current on your property taxes and considers you falling behind as an independent violation of your mortgage agreement, this gives your lender a separate reason for IT to foreclose on your home.

So Chapter 13 gives you time to catch on your property taxes while both protecting you from the property taxing entity itself and preventing your mortgage lender from using your unpaid property taxes as a separate reason for foreclosing on your home.

8. … prioritize paying many home-related debts—such as property taxes, support liens, utility and construction liens—that you need to and often wish you were able to pay.

Neither Chapter 7 nor Chapter 13 enables you to simply get rid of these special kinds of liens on your home. But Chapter 13 allows—indeed often requires—you to pay them in full ahead of most of your other creditors. This often benefits you because it allows you to focus your limited financial resources on paying those debts which will preserve and add equity to your home.

9. … get rid of judgment liens, so that they no longer attach to your home.  

If a creditor sues you and you don’t respond by the deadline to do so, the creditor will get a judgment—a court determination that you owe whatever the creditor’s lawsuit says you owe. Most of the time that judgment creates a judgment lien against your home. Depending on a number of factors like the value of your home, the amount of your mortgage(s) and other liens, the amount of the judgment lien, and the amount of the homestead exemption that you are entitled to, bankruptcy will allow you to “void”—get rid of—that judgment lien. This is very important because otherwise even if the underlying debt is discharged, the judgment lien would survive the bankruptcy, causing you to still have to pay the debt eventually, in part or in full.   

If you qualify for judgment lien “avoidance” it can also be done under a Chapter 7 case, but it is often better in a Chapter 13 case when used in combination with these other tools.

10. .. sell your house without the pressure of a foreclosure sale, either just a short time after filing the Chapter 13 case, or sometimes even three, four years later.

If you are close to selling your home, or have just started the process but want to sell as soon as you can, Chapter 7 usually buys you very little time in avoiding a pending foreclosure. It gives you very little leverage or flexibility. In these situations, Chapter 13 will usually buy you more time to sell while preventing foreclosure. And, especially if you have some equity in your home, it will give you more payment flexibility.

Or if you want to sell your home a few years from now, Chapter 13 can give you some very valuable flexibility in catching up on a mortgage arrearage. You may be planning on downsizing once your children finish high school or you reach some other important life event. Or you may want to wait until property values increase over the next couple years. Under Chapter 13 you can often put off catching up on some or all of your mortgage arrearage until that anticipated sale date, making it more financially feasible to keep your home in the meantime.

 

/by

Are These Sensible Reasons to Do A Short Sale? Maybe, Maybe Not

Let’s look at some commonsensical reasons to do a short sale of your home and see if they make sense.

 

My last blog post showed how a short sale may be harder to achieve than you might think, and how they can be dangerous if you do it without advice from an attorney looking out for you.

So today we follow up by looking more closely at why you would do a short sale. Besides probably the most common one of simply trying to avoid the bad credit of a foreclosure, which we addressed last time, here are some other common reasons:

1. No Choice, Can’t Afford the House

If your income has gone down or your mortgage payments have gone up so that you can’t keep making the payments, it may make sense to downsize—sell your home and rent. And if you can’t sell your home because it’s worth less than the mortgage balances, then a short sale may seem to be the only way to leave the home and its debt behind.

However…

Monthly rental payments have climbed significantly in the last several years as more people have lost their homes to foreclosures, and less young people have been able to afford or qualify for a mortgage because of the tough employment market and skyrocketing student loan debt.  Demand has outstripped the supply of rental housing in many markets, greatly increasing the cost to rent.

Also, you have many legitimate tangible and intangible reasons to stay in your home. If you leave this home it may be a long time before you would have the financial means to buy again, especially with the tighter credit standards that are likely to be in place for years. Property values in many parts of the country have gone up significantly in the last year or two and seem to be on a trajectory to continue doing so. So you may be building equity in your home soon. And your family may benefit from staying in your home for deep personal reasons—to maintain family stability, to avoid leaving your kids’ school district, and such.

So if there would be a way that you would be able to afford your home, that way would be worth considering carefully.  

2.  Can’t Reduce House Mortgage Payments, Right?

It’s true that you are largely stuck with whatever your monthly first mortgage payment amount is. And if you are behind on those payments, you will have to catch up if you want to keep your home.

However…

If you have a second (or third) mortgage, you may be able to “strip” that mortgage off your home’s title so that you would not need to make that mortgage’s monthly payments. This can happen under a Chapter 13 “adjustment of debts” if your home is worth less than the balance of your first mortgage, so that there is no equity at all in your home for the second mortgage.

By “stripping” this second mortgage from your home, your debt on that mortgage debt would be treated as an unsecured debt, just like all of the rest of your conventional unsecured debts (credit cards, medical bills and such). This means you would pay that mortgage debt during your 3-to-5 year Chapter 13 case as much, but only as much, as you could afford to pay on it, which is often not much—sometimes even nothing. Then at the end of the case, whatever has not been paid by then is discharged–legally written off completely.

As a result you avoid having to pay the monthly second mortgage payments, and the debt against your home is significantly reduced. These—along with the other benefits of Chapter 13—can potentially make hanging onto your home both financially feasible in the short term and financially much more sensible in the long term. You would pay less each month for a home with much less debt on it.

3.  Needing to Resolve Other Liens

You may feel compelled to do a short sale not just because of your mortgage obligations, but because of one or more other obligations which have attached to your home’s title, with a tax, judgment, support, utility, or construction lien.

You may be under a great deal of pressure to pay one or more of these obligations. The IRS, state tax, and child support enforcement agencies can be especially aggressive. So you could understandably feel that you have no choice but to sell your home to get that aggressive creditor paid, and to sell by short sale if necessary.

The problem is that the more lienholders you have, the more creditors must be corralled into accepting less than their full balance in return for releasing their lien on your home. And even if the special lienholder releases its lien for less than full payment so that the short sale succeeds, you will continue owing the balance, and likely continue being pursued for payment.

However…

Either Chapter 7 or Chapter 13 bankruptcy can often deal well with each of these kinds of lienholders. Both may be able to “void” judgment liens. Chapter 13 is particularly adept at attacking tax and support liens and their underlying debts. Furthermore, you can be protected for years from any further collection efforts by these otherwise very powerful creditors, in ways that no other legal procedure could accomplish.

Conclusion

Bankruptcy options often give you more control over your home and over your financial life than would occur through a short sale. Given what’s at stake, it certainly makes sense to consult an attorney about your options. Your attorney is on your side, legally and ethically bound to explain all your options as they relate to your personal goals and your best interests.

 

/by

Short Sales of Your Home–Sometimes Necessary, Often End Not As You Expected

A short sale might be your best alternative. But they can be hard sales to close, and may not accomplish what you hope.

 

Someone Doesn’t Get Paid

In a short sale, you sell your house by “shorting”—underpaying—one or more of the lienholders, because the sale price is not enough to pay everyone in full.

In the depths of the recent real estate crash, a large percentage of home sales were short sales because the value of so many houses had fallen below what was owed on them. Even though property values have climbed in many parts of the country, there are still millions of homes “under water,” and so can only be sold in a short sale.

Why Short Sales Are Harder to Close

You can imagine that if a mortgage holder or someone else has a lien on your home and a legal right to be paid in full, it will be reluctant to take anything less than payment in full before releasing its lien. And these lienholders can include not just voluntary ones like your first and maybe second mortgage, but also judgments, income taxes, support obligations, unpaid utilities, and property taxes. Generally all lienholders must consent and release their liens, or the sale cannot occur.

Their Benefits

Beyond getting out of a house that you can’t afford, the main benefit of a successful short sale is that it avoids a foreclosure on your credit record. Although in general that is a sensible goal, a short sale is also likely detrimental on your credit record—after all you are not paying one or more of your creditors in full. Also, given how many millions of foreclosures occurred in the last 5-6 years, there is some indication that there is and will continue to be less credit record difference between a short sale and a foreclosure. Depending on the rest of your credit record, now and in the future, focusing on avoiding foreclosure may not be as important as you may think.=

Short Sales Often Do Not Come Together

Most short sales take much more effort and time to pull off than expected, so they usually take longer, and then often fail to close, putting the homeowners further behind and no better off. The reasons they often don’t work are:

  • Unhelpful and slow mortgage lenders: In a short sale usually the first mortgage holder has to give some money from the sale proceeds to a junior lienholder or two. The only reason the first mortgage holder would do that is if getting a little less out of the sale is better than going through the delay and cost of a foreclosure. Although many mortgage lenders have gotten better organized and staffed to process short sales, working with them can still be like pulling teeth.
  • Any lienholders can refuse to cooperate and kill the deal: When the pie that is too small, it’s hard to make everybody happy and cooperative. Any lienholder can refuse to take the proposed reduction in payment and jeopardize the closing.
  • The realtors and other middlemen often have the most to gain: Realtors and others in the real estate sales industry often benefit more from a short sale than you do. There are good reasons that unbiased observers—like bankruptcy judges—tend to discourage short sales.

Short Sales Can Be Dangerous

You could end up legally liable to those lienholders who were not paid in full, and could also potentially owe extra income taxes.

  • Unpaid balances on the junior mortgages and liens: You may be told that you will not be liable on debts that aren’t paid in full from the home sale, but that’s not always true. You need to be sure that the settlement documents and the applicable law in fact cut off any liability. Be careful about feeling forced to accept some remaining liability just to get the deal done.  
  • Potential tax consequences: This issue is a complicated one that can’t be covered here in adequate detail. The main point is that debt forgiveness can be treated as income subject to taxation unless you fit within one of the exceptions. Make sure you talk with an appropriate tax specialist about this before investing any time or expectations in the short sale option.  

Short sale attempts often fit two wise rules of thumb: 1) desperate actions often lead to no good, and 2) if it sounds too good to be true, it probably is.

 

/by