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Major Advantages of Chapter 13 for Saving Your Home

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

 

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

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

The First Five Chapter 13 Advantages

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

2. Stripping second or third mortgage.

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

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

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

6. The Chapter 13 “Super-Discharge”

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

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

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

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

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

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

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

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

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

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

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

9. Judgment Lien “Avoidance”

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

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

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

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

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

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

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

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

 

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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.

 

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Choose between Your Prior and Present State’s Property Exemptions When You Have Timing Flexibility

If you moved to your present state less than two years ago, when you file bankruptcy can affect how much of your property is protected.

 

Even though bankruptcy is a federal procedure, the state where you are “domiciled” can greatly affect how much of your property you can protect in bankruptcy. In a Chapter 7 “straight bankruptcy” case, this can determine whether you have to surrender any of your property to the bankruptcy trustee. In a Chapter 13 “adjustment of debts” case, this can determine how much you need to pay to your creditors during your payment plan.

Property Exemptions Can Be Very Different State to State

The property exemption laws of one state can be radically different from those of another state, even if that state is right next door.

Take the example of the exemptions available to a person who lives in Mobile, on the southern tip of Alabama, and those available to someone who lives an hour drive to the east in Pensacola, on the Florida Panhandle.

First one similarity: both Alabama and Florida, like a majority of the states, require their residents to use their state property exemptions instead of a federal set of exemptions in the Bankruptcy Code. So a long-time resident of Mobile must use the Alabama exemptions in her bankruptcy filing, while a long-time resident of Pensacola must use the Florida exemptions.

These two states’ homestead exemptions—the amount of value in your home that you can protect from creditors—are a stark example how exemptions can be radically different. Alabama has one of the least generous homestead exemption amounts—$5,000 in value or equity, or $10,000 for a couple—while Florida has one of the most generous—unlimited value or equity. Simply put, if a person owned a $150,000 free and clear home in Mobile (or one with that much equity) and filed a Chapter 7 case, the Chapter 7 trustee would take that home, sell it to pay creditors, and give the person the $5,000 exemption amount (and possibly any left over after paying the creditors in full). That same valued house in Pensacola (or one with that much equity) would be completely protected, the trustee could not touch it, and the creditors would get nothing from it.

(Note that if you “acquired” your present homestead within 1,215 days (about 40 months) before filing bankruptcy—and the equity for it did not come from a prior principal residence in that same state—then your homestead exemption is limited to a maximum of $155,675, even if your present state’s exemption is more generous. (See Section 522(p) of the Bankruptcy Code.) The point of this law is to discourage people from moving to and buying a house in a state with a high or unlimited homestead exemption in order to shield their assets from bankruptcy.)

Choosing between Your Prior and Present States’ Exemptions

You may have an opportunity to take advantage of the difference in exemptions between your prior and present state because of the bankruptcy law that determines which state’s laws you must use. If you have lived in your present state for the last 730 days (2 times 365 days), then the property exemptions which will apply to your bankruptcy case are the ones allowed in your state. However, if you moved during these last 730 days from another state, then the exemptions of your prior state will apply.

(To be picky, you follow the law of the state where you had your domicile—generally, where you were living—“during the 180 days immediately preceding the 730-day period.” See Section 522(b)(3)(A) of the Bankruptcy Code for all the gory details.)

So if you moved from another state to your present state in less than two years, and you file a bankruptcy before the 730-day period expires, than you must use the exemptions of your prior state. But if you wait until immediately after that 730-day period expires, you must use the exemptions of your present state.

Find Out If the Different States’ Exemptions Matter to You

It is definitely possible that all of your property is protected by the exemptions available in EITHER state. The contrast in homestead exemptions above between Alabama and Florida is an extreme one. Most people who file bankruptcy do NOT lose any of their property. So the first thing you need to do if you have moved in the last two years from another state and are in financial trouble is talk to a local bankruptcy attorney. Find out if you have any assets which would be protected better by either of your two states. And if so, see if it is worthwhile in your particular situation to pick when you file your bankruptcy case based on which state’s exemptions are better for you. You certainly don’t want to be in the situation when you find out too late that you could have protected your property better by filing a few months or even a few days earlier. 

 

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