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Quick Rules about Preserving Your Home through Bankruptcy

When does filing bankruptcy save your home?  When is “straight bankruptcy”—Chapter 7—the right tool, and when do you need Chapter 13?  

If your most important goal is to preserve your home, here’s how each kind of bankruptcy helps (or doesn’t help) in different circumstances.

1. If you’re current on your home mortgage(s) but struggling to keep that up, and are behind on some or many of your other debts:

Chapter 7:  Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Would also stop those other debts from turning into judgments, which would likely be liens against your home. May also enable you to avoid falling behind on other obligations—income taxes, support payment, utility bills—which could also otherwise turn into liens against your home.

Chapter 13:  Does the same as above, plus is often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to get rid of a second or third mortgage.  Is better at protecting assets, if you either have more equity in your home than your homestead exemption allows or have any other “non-exempt” asset(s).

2. If you’re not current on home mortgage(s) but are only very few payments behind, with no foreclosure started:

Chapter 7:  May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies will agree to give you several months—sometimes up to a year—to catch up on your mortgage arrears. That’s a “forbearance agreement”—they agree to “forbear” from foreclosing as long as you make the agreed payments. Tends to work only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if the Chapter 7 filing will allow you to stop paying enough to other creditors so you will be able to pay off the mortgage arrearage quickly.

Chapter 13:  Even if you’re only a few thousand dollars behind, you may well not have enough extra money each month to catch up quickly on that mortgage arrearage.  Lenders seldom voluntarily give you more than 10-12 months to catch up, but a Chapter 13 forces them to give you a much longer period to do so—three to five years. That greatly reduces how much you need to pay towards the arrears every month, often turning the impossible into the achievable.

3. If you’re many payments behind on your mortgage(s), regardless whether a foreclosure has started:

Chapter 7:  Not helpful here unless you have some extraordinary means for paying off the large mortgage arrears. Buys only a few weeks of time, at most three months or so (if the mortgage lender chooses to do nothing while your bankruptcy case is pending). Also, cannot get rid of a second or third mortgage.

Chapter 13:  Again, gives you the option of up to five years to slowly but surely pay off the mortgage arrearage, during all of which time your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan payments. Assumes that you can at least make the regular mortgage payment consistently, along with the arrearage catch-up payment. Does not, under current law, enable you to reduce the first mortgage payment amount, although again might be able to get you out of your second or third mortgage

If any of this looks like it could provide the help that your home needs, please give me a call. Remember: these are just the broad rules. There are lots of other twists and turns which will likely apply to you. To understand the advantages and disadvantages of each option, and to get practical advice about what direction to go, you should see an attorney. Let me show you how the law can help meet your needs.

 

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Chapter 13 Conquers Both Older and Newer Income Taxes

If you owe a number of years of income tax debt, Chapter 13 allows you to favor those taxes that have to be favored, while dumping the taxes that can be dumped.

In my last blog I gave an example showing how Chapter 13 can be an extremely good way to handle income tax debts particularly when you owe multiple years of taxes. In that hypothetical case, without a bankruptcy a couple would have had to pay about $30,000 to the IRS for back taxes, plus about another $45,000 in medical bills and credit cards, a total of $75,000. And paying this huge sum of money on their income would have taken them many, many years of pressure and uncertainty. In huge contrast, in a Chapter 13 case this same couple would only need to pay about $17,500, less than 1/4th the amount. And they would be allowed to do so through pre-arranged affordable monthly payments, for three years, all the while not having to worry about aggressive actions by any of their creditors, including the IRS.

How does Chapter 13 pull this off?

1) Tax debts that are old enough are lumped in with the lowest priority “general unsecured” creditors—like medical bills and credit cards—and so in many cases do not need to be paid anything unless there is enough “disposable income” to do so. This means that often those taxes are paid either nothing—as in the example—or  only a few pennies on the dollar.

2) The more recent “priority” taxes DO have to be paid in full in a Chapter 13 case, along with interest accrued until the filing of the case, but a) penalties—which can be a large part of the debt—are treated like “general unsecured” debts rather than “priority” ones, and 2) usually interest or penalties stop when the Chapter 13 is filed. These can significantly reduce the amount of tax that has to be paid.

3) “Priority” taxes are paid in a Chapter 13 case before and instead of “general unsecured” debts. This often means that having these taxes to pay simply reduces the amount of money which would otherwise have gone to those “general unsecured” creditors. So sometimes, amazingly, having tax debt does not increase the amount paid in a Chapter 13 case. In our example, the couple paid about $500 per month for three years, which is the same amount they would have paid even if they did not owe a dime to the IRS! They met their obligations under Chapter 13 by paying the IRS instead of their other creditors.

4) The bankruptcy law that stops creditors from trying to collect their debts while a bankruptcy case is active—the “automatic stay”—is just as binding on the IRS as on any other creditor. The IRS can continue to do some very limited and sensible things like demand the filing of a tax return or conduct an audit, but it can’t use the aggressive collection tools that the law otherwise grants to it. Gaining relief from collection pressure from the IRS AND all the rest of the creditors is one of the biggest benefits of Chapter 13.

I confess that I put this example together in a way that would showcase the advantages of Chapter 13 in dealing with income tax debts. If the facts were different, the advantages could easily be less. If, for instance, more of the taxes were “priority” debts that had to be paid, the debtors would have to pay more, either through larger monthly payments or for a longer period of time. There are definitely situations where it is a close call choosing between Chapter 7 or Chapter 13, or possibly even not filing bankruptcy at all but doing an offer in compromise with the IRS. To decide what is best for you, you need the independent advice of an experienced bankruptcy attorney, who is ethically and legally bound to look out for your best interests. Regardless whether your tax debts and other circumstances point strongly in one direction or it’s a closer call, you need a professional qualified both to help you make an informed decision and then to execute on it.  

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