Chapter 13 Benefits for Real Estate that Is Income-Producing and Equity-Creating

Chapter 13 can be an effective way to temporarily or permanently hold on to business and investment real estate equity and income.

If you own real estate that is not your home, filing a Chapter 7 “straight bankruptcy” would likely result in you losing control of what happens to that real estate. In our last blog post we showed how filing a Chapter 13 “adjustment of debts” case could give you more control over that. Often you have more control over whether the property is sold or retained, whether undesirable real estate can be surrendered to its mortgage holder, and the timing of such events.

Chapter 13 also can also much better protect equity in your real estate from your creditors. If that real estate is producing income for you, Chapter 13 can often protect that income and put it to much better use. Furthermore, because Chapter 13 is much more flexible than Chapter 7, and its protection against your creditors lasts for years instead of just a few months, it can give you the opportunity to build equity in your real estate.

More Benefits to the Real Estate within Chapter 13
—Protecting the Equity

If your real estate clearly does have equity, in a Chapter 7 case you would definitely lose the real estate to the bankruptcy trustee and its sale proceeds to your creditors. After all, Chapter 7 is a liquidation form of bankruptcy, and anything that is not protected through property “exemptions” is usually taken by the trustee and sold to pay your creditors.

Usually real estate that is not your home is not protected by an exemption (although there are possible exceptions in certain states under certain circumstances). So again you’d likely lose such property in a Chapter 7 case.

But what if you needed the real estate for your business? Or what if you had some deep personal or family connection to the real estate?

Chapter 13 allows you to keep non-exempt property under many circumstances. You may well have to pay more or longer into your payment plan to pull this off. But in some situations that may not even be necessary.

Determining whether you can keep real estate that is not exempt, and what you would have to do in a Chapter 13 case to pull that off, requires a rather complicated case by case analysis. So you need to talk about this with an experienced bankruptcy lawyer. The point here is that being able to keep otherwise unprotected real estate is much more likely under Chapter 13 than Chapter 7.

—Protecting Real Estate Income

The minute you file a Chapter 7 case the bankruptcy trustee has a right to all rents and other income from your real estate. This is true even if the trustee later decides to abandon that real estate.

In contrast, under Chapter 13 income from real estate is treated much more like your income from employment. Your income from all sources is used to determine your monthly “disposable income”—your income after expenses—and the amount you can afford to pay into your monthly Chapter 13 payment plan.

There are other considerations—such as whether you can financially justify keeping that real estate going forward. But again it’s much more likely that you would be able to keep, or put to good use, income from such real estate under Chapter 13 than under Chapter 7.

—Creating Real Estate Equity under Chapter 13

One of the ways you can justify keeping real estate in a Chapter 13 case—either permanently or to sell later in the case—is to show that you are building equity in the real estate during the course of the case. You can create equity three ways:

1. The real estate may have liens on it—for property taxes, income taxes, or child support, for example—on debts that you would be paying off during the course of the case. Paying off those debts would result in the release of the liens, building equity in the real estate relatively quickly.

2. Some liens—such as for older income taxes—many not have to paid in full or sometimes even in part. The underlying debt may be discharged—legally written off—resulting in the release of such liens, and resulting in the building of equity in the real estate.

3. If the real estate’s value is rising year over year, over the span of a 3 to 5 year Chapter 13 case equity will be created through that appreciation, along with the reduction in the mortgage’s principal balance during that time.

In a Chapter 7 case, as a liquidation form of bankruptcy that fixates on you and your real estate’s status as of the moment your case is filed, future equity is essentially irrelevant. Chapter 13 can open up opportunities to build such future equity to your benefit. 

 

Use Chapter 13 if You’re Behind on Your Vehicle Loan

Chapter 13 gives you lots of time to catch up on your vehicle loan. Or you might not even need to catch up on it at all.

 

Chapter 7 sometimes gives you just enough of a break and enough time to catch up on your vehicle loan if you’re behind. But usually it only buys you a couple months. However, Chapter 13 gives you many months, maybe even several years, to catch up.

Also, if you owe more on the loan than the vehicle is worth, and you got it more than two years and a half years ago, you probably won’t even need to catch up on missed payments. On top of that, you will likely be allowed to lower you monthly payments, and pay less on the loan overall until you own your vehicle free and clear.

Let’s show you how this works.

The Law about Falling Behind on Your Vehicle Loan

A vehicle loan really consists of two commitments made to your lender:

  • a promise to pay a certain amount each month, plus interest, until the debt is paid off
  • a lien on the vehicle that you’ve granted to the lender, giving it a right to repossess your vehicle if you don’t keep your promise to pay

So when you fall behind on your vehicle payments, your lender has the right to repossess your vehicle. But once you file a bankruptcy case, the “automatic stay”—your protection against most collection actions against you or your property—stops the vehicle repossession. This protection lasts as long as the bankruptcy case is open and active.

The exception is if your lender files a motion to ask the bankruptcy court for “relief from the automatic stay.” If it succeeds in that motion, the lender gets the “automatic stay” lifted as to the vehicle and would again be able to repossess your vehicle.

If You’re Behind on Your Vehicle Loan under Chapter 7

A Chapter 7 case is open usually for three, four months. So that is how long you have protection from repossession if you are not current on your payments. (Again, that time period of protection could be shorter if the lender files and prevails on a motion asking that the “automatic stay” protection be lifted.)

Chapter 7 could be a good option for your vehicle loan if you can get current on that loan before the automatic stay expires. Practically speaking, that usually gives you about two months or so after the bankruptcy filing to get current.

You don’t usually get the full three, four months that the case is open. That’s because the lender prepares a document called a reaffirmation agreement, which you must sign and is then filed at the bankruptcy court, all before the case closes. Lenders generally want you to be current when the reaffirmation agreement is filed at court. Plus preparing that paperwork and getting it signed and filed takes a certain amount of time.

So essentially, if you want to keep a vehicle that you’re behind on its payments, filing a Chapter 7 case would be a sensible option if you know you will be able to bring that loan current within about two months of your bankruptcy filing. Certain vehicle lenders might be more flexible and give you more time, but that’s not common. Ask your attorney about the practices of your lender when you discuss your vehicle loan options.

If You’re Behind on Your Vehicle Loan under Chapter 13

If you need more time than two months or so to catch up on your vehicle loan, then Chapter 13 may be the right option for you.  That’s because in most situations you would be allowed to catch up over a period of many months, potentially even of a few years.

In some situations you may not even need to catch up at all. This happens if, and only if:

1) you took out the loan more than 910 days (about 2 and a half years) before you file your Chapter 13 case, and

2) your vehicle is worth less than your debt against it.

If so, you are eligible for what is informally called a “cramdown” of the vehicle loan. You will NOT need to catch up on the loan at all as to any payments not paid before your Chapter 13 case was filed.

You would just need to make payments starting after your case was filed, But through “cramdown” most of the time that payment would be less than the contractual amount. Depending on all the circumstances, the payment may be much less. The interest rate can often be reduced as well.

When you combine not needing to pay the missed payments, the lower monthly payments, and the lower interest rate, the end result is that you end up paying less on the loan overall. It’s not unusual that you pay thousands of dollars less. At the end of your successful Chapter 13 case whatever you haven’t paid on the vehicle loan’s contractual balance is “discharged”—permanently written off. Then the lender releases its lien, and the vehicle is all yours.

 

Chapter 13 Benefits Directly Related to Real Estate Other than Your Home

Chapter 13 can be an effective way to keep or unload business and investment real estate.

 

Our last blog was about selling real estate that is not your home within a Chapter 13 “adjustment of debts” case. We showed how this would give you more control over the timing and other important circumstances of the sale than if you just surrendered the real estate through a Chapter 7 “straight bankruptcy.”

But Chapter 13 may provide other benefits to consider.

Some of those benefits are related to the real estate itself. We’ll cover those today and in our next blog post.

Benefits under Chapter 13 Related to the Real Estate
—Control over Keeping or Selling

When you file a Chapter 7 case you hand over total discretion about that decision to the bankruptcy trustee. He or she chooses whether to take possession and control over the property, whether to sell it, and all the circumstances of that sale. The guiding principle for the trustee’s decision is whether your creditors will benefit, with essentially no consideration for your interests.  

Under Chapter 13 you have at least some say about what to do with the real estate. For example, if you believe that with some “sweat equity”—repairs done through your efforts plus a modest amount of money—you could increase the equity in the property and thereby pay more than you would otherwise to your most important creditors, you’d have to opportunity to make your case about this.

You do have to justify what you propose to do with the real estate, and so your discretion is definitely limited. For example, if want to keep your real estate but it has no equity, requires monthly payments on a mortgage, and produces no financial benefit, you’re going to have a tough time justifying keeping that real estate. Keeping the real estate has to be part of a sensible financial plan.

—Surrendering Undesirable Property

This loss of decision-making includes your likely inability to get rid of real estate that you want to be rid of. It’s not unusual to have real estate that is a significant burden to you. For example, you may very much want to get out from under a rental home where the last tenants manufactured “meth,” with the result that the clean-up costs are prohibitively expensive. Your mortgage holder is not foreclosing, so you file a Chapter 7 case thinking that the bankruptcy trustee gets the property out of your hands. Not necessarily.

The Chapter 7 case may well discharge (legally write off) your mortgage debt, along with all or most of your other debts. But the Chapter 7 trustee would very likely choose to “abandon” the real estate back to you on the grounds that it is “burdensome” or “of inconsequential value and benefit” to your creditors. See Section 554(a) of the Bankruptcy Code.

So you’d still be saddled with the real estate after your Chapter 7 would be over, probably continuing to incur new debts for property taxes, potentially for homeowner association dues and assessments, city fines, and such.

Under Chapter 13 you may be able to be more proactive with such property. You may be in a stronger negotiating posture with the mortgage lender to induce it to accept its losses and foreclose on the property. The bankruptcy court may help with this since that one creditor is potentially harming your ability to pay the other creditors. At the very least you would have the power to convert the Chapter 13 case into a Chapter 7 one once the foreclosure occurred, allowing you to discharge the debts on the property that accrued in the meantime.

 

(Our next blog post in a couple days will have more about how Chapter 13 can help you temporarily or permanently retain and build your equity in business and investment real estate, and your income from it.)

 

Selling Real Estate Other than Your Home under Chapter 13

Chapter 13 is often a better way to sell real estate, especially if you have other financial complications.

 

Our last blog was about letting go of real estate that is not your home through a Chapter 7 “straight bankruptcy.” We showed how you can escape debts related to the property. We also showed how you could possibly even have your “priority” debts paid by the Chapter 7 trustee out of any proceeds of the sale of that property.

But Chapter 7 provides limited help. It’s appropriate for certain scenarios, generally more straightforward ones. If you own real estate other than your home, there is a good chance that you have complications that would be better handled through a Chapter 13 “adjustment of debts.”

Chapter 13 Better If…

What kinds of complications would make Chapter 13 the better option?

  • if the real estate has equity and you want some control over the its sale and its timing
  • if the real estate has equity and you want some control over who gets paid out of the proceeds of sale
  • regardless whether the real estate has any equity, Chapter 13 gives you important benefits, some related to the real estate and some unrelated

Control Over Real Estate Sale and Its Timing

In a Chapter 7 case if you have any asset that is not “exempt”—protected from creditors—the bankruptcy trustee takes control over the asset. In the case of real estate with equity, the trustee would decide whether your creditors would benefit from its sale. If the trustee decides to sell it, he or she hires a realtor (usually) and goes through the sale process. You would not have any say in that process, other than to respond to the trustee’s requests for information and cooperate with the trustee’s sale. You would generally have little or no say in when the property is sold, how much it is sold for—beyond very broad standards of reasonableness—or to whom it is sold.

A Chapter 13 case gives you much more control over the sale.

Through a formal Chapter 13 plan put together with the help of your attorney, you propose what you want to do with the real estate, when you want to sell it, for how much, and who will be paid from the proceeds.

There ARE a bunch of rules the plan has to follow. Creditors and the Chapter 13 trustee get a say in the process. The bankruptcy judge has to approve the plan, and resolves any disputes about it. But you have much more say about what happens under Chapter 13 than under Chapter 7.

For example, you would likely be able to hire a realtor of your choosing, and decide whether to put some energy and maybe some money into getting the property ready for sale. Depending on the circumstances you may be able to delay marketing the real estate if the property is increasing in value. You may even be able to sell the property to someone you prefer as long as the transaction is otherwise fair. Overall, you are in control of the sale—albeit under the oversight of the Chapter 13 trustee and the bankruptcy court.

Control Over Who Gets Paid from Real Estate Sale Proceeds

In a sale of your real estate within a Chapter 13 case, valid liens against that real estate would of course have to be paid through escrow as usual. Then if you are entitled to any exemption on the real estate (an amount shielded from your creditors) you would be paid that amount out of the remaining sale proceeds.

But because Chapter 13 is an ongoing process involving your income and expenses, you may not be able to keep that exempt amount. You are generally required to pay “into the plan” all your “disposable income” (generally all income beyond your necessary business and personal expenses). But that may be negotiable. For example, if you need to replace your vehicle, or if it or your home urgently needs some maintenance or repair, some or all of the real estate sale proceeds could go towards such necessary expense(s).

If there are any remaining proceeds after that, there are rules in Chapter 13 about which debts are paid ahead of others out of those proceeds. But within those rules there is some flexibility. For example, certain secured and “priority” debts must be paid in full by the end of the 3-to-5-year payment plan, but you may have some flexibility about which ones are paid faster.

An example can show how this could be of significant practical benefit. 

Early in your Chapter 13 plan you may want to earmark money towards a debt that is particularly important to you, say a child support arrearage in order to bring some peace between you and your ex-spouse. Or you may want to start by catching up on property taxes on your home to avoid the high interest rate and to calm down your anxious mortgage lender. Then you could earmark other important but less urgent debts to be paid somewhat later from the subsequent sale proceeds of the (non-home) real estate. For example, you could hold off paying “priority” income taxes until the sale of the real estate. That because those taxes have to be paid by the end of the Chapter 13 case but incur no interest and penalties in the meantime. And the IRS and state tax agency can’t pressure you during the case. 

Chapter 13 Benefits Related and Benefits Unrelated to the Real Estate

Beyond the question of maintaining greater control over the real estate sale process, timing, and payout, Chapter 13 may provide you many other benefits over Chapter 7. Depending on your circumstances, those benefits may tie in with the real estate itself or may be unrelated to it. We’ll tell you about both sets of benefits in our next blog post.

 

Surrendering Real Estate Other than Your Home in Bankruptcy

Chapter 7 writes off your mortgage debt, many other debts against the property, and potentially pays your “priority” debts as well.

 

If you own real estate that is NOT your home, and you’re considering bankruptcy, there’s a good chance that real estate is part of what’s dragging you down financially.

Maybe you made an investment that turned sour. Or the property is tied in somehow with a business that did not succeed. Or you may even have gotten the real estate by inheritance or divorce but it’s more of a burden than a benefit because of the debts against it.

How can filing Chapter 7 “straight bankruptcy” help with this?

Chapter 7 to Write Off Real Estate Mortgage Debt

In many states if you surrender your home to your mortgage lender, that lender can no longer pursue you for any liabilities related to that mortgage. That’s usually not the case with mortgages on business or investment property. You can often end up owing much of the mortgage debt after surrendering such property.

Chapter 7 to Write Off Other Real Estate-Related Debt

The debts can include not just the mortgage loan itself but various other potential obligations with liens against the property, for

  • real property taxes
  • commercial association dues and assessments
  • your business’ income and sales taxes
  • unpaid utility bills
  • city and other local assessments and fines
  • building contractor’s repairs
  • your personal unpaid federal and state personal income taxes
  • child and spousal support obligations
  • divorce property division

Some of these obligations tend to stay with the property and would be paid by your mortgage lender after taking possession of and selling the property. Real estate taxes are an example.

Some of these obligations do not get written off in a Chapter 7 bankruptcy. Child and spousal support and recent income taxes are examples.

Most of the rest of the obligations are ones that you would be personally liable for, would not be paid by your mortgage lender, and could be “discharged”—legally written off in bankruptcy. Examples are unpaid utility charges, contractor repairs, and older personal income taxes. A Chapter 7 bankruptcy case gets rid of these obligations—along with all or most of your other personal and business debts—and usually does so within a matter of just 3 or 4 months after the case is filed.

So, regardless whether you have equity in the real estate or not, consider a Chapter 7 bankruptcy to surrender that property to your primary mortgage holder, discharge  your debt to that mortgage holder, as well as most or all of your other debts against the property.

Chapter 7 to Pay Special Debts

In addition, if you DO have equity in your real estate and owe certain special kinds of debts, you can file a Chapter 7 case and have those special debts be paid in full or in part out of that real estate equity.

This can happen because under bankruptcy law certain kinds of debts are paid in full by the bankruptcy trustee before other debts receive anything.  These “priority” debts often also happen to be debts that are not discharged in bankruptcy, so you would have to pay them yourself after your Chapter 7 case was finished. Examples include more recent personal income taxes, and child and spousal support arrearage.  So you of course prefer that these “priority” debts be paid first out of the proceeds of your real estate, instead of other debts that would be discharged and you wouldn’t have to pay them after your bankruptcy case was done.

As a result, instead of surrendering your real estate with equity to your mortgage lender, you surrender it to the bankruptcy trustee. The trustee then sells it, the creditors with liens on the property are paid through escrow at the closing of the sale, and the trustee pays the remaining sale proceeds first to your “priority” debts. You end up either owing nothing on those “priority” debts after your bankruptcy is done, or at least less than you would have otherwise.

 

Get Chapter 13 Help for Special Debts

Chapter 13 protects you while you catch up on or pay off important debts.

 

Chapter 7 sometimes doesn’t help you enough with certain debts. Those tend to be ones that either can’t be written off or you don’t want to write off. Examples are relatively recent income tax debts, child and spouse support that you’re behind on, and unpaid home mortgage payments.

There are times when filing a straight Chapter 7 case will help you enough by writing off your other debts so that you have the financial means to take care of the remaining special debt that does not get written off. But other times you need the extra protection that a Chapter 13 payment plan gives you.

Three special kinds of debts were mentioned above: income taxes, child and spousal support, and mortgage arrearage. The following shows the ways Chapter 7 can sometimes help with these special debts, along with ways that Chapter 13 can help more if it’s necessary.

Income Taxes

Some income taxes can be discharged (written off) in bankruptcy, including under Chapter 7. But some can’t.

Although there may be some other considerations in your situation, generally the tax you owe has to meet both of two conditions to get discharged:

1. More than 3 years must have passed from the time your tax return for the tax was due until the time the bankruptcy is filed. Plus if you got an extension to submit that tax return, add that extended time to the 3 years.

2. More than 2 years must have passed from the time the tax return was actually submitted to the IRS/state until the time the bankruptcy is filed.

If you owe a tax debt that will not be discharged, filing a Chapter 7 case might still make sense.  The tax debt may be modest enough so that you can make payment arrangements (by yourself or with the help of your attorney) directly with the IRS or state tax agency). If the monthly payment amount is manageable, Chapter 7 could the more sensible way to go.

But what if the tax amount is too large so you can’t afford to pay the IRS/state the monthly installment it is requiring? Or what if you have a number of debts that would not be discharged under Chapter 7 and they’ll be competing with the IRS/state for your money afterward?

In these situations Chapter 13 would help in the following ways:

  • You would likely get more time to pay off the tax.
  • The IRS or state agency would be prevented from taking collection action against you, your income, and your assets, at least not without first getting permission from the bankruptcy court.
  • You would usually not have to pay interest and penalties on the tax debt from the time your case is filed. This enables you to pay off the tax debt with less money.
  • You can generally pay other even more important debts ahead of the taxes, giving you more flexibility.

Child and Spousal Support Arrearage

State laws allow ex-spouses and support enforcement agencies to be extremely aggressive in their collection methods. Nevertheless, if you are behind on support payments you may be able to arrange a catch-up program with them directly. This greatly varies from one locality to the next, and depends on the circumstances of your case. So, if in your situation you can make such arrangements, and are very confident of being able to maintain the agreed payments after discharging your other debts, then Chapter 7 may make sense for you.

But otherwise you need the extraordinary power of Chapter 13. It can give you as much as five years to bring the support current, although you may want to and be able to do so much earlier. You do have to meticulously keep up with your ongoing monthly support payments in the meantime, assuming you still owe them. You also have to keep making your Chapter 13 plan payment on time, since that is the source for curing the support arrearage. But as long as you fulfill these requirements throughout your Chapter 13 case your ex-spouse and support enforcement agency are prevented from using the very tough collection tools against you usually available to them.

Home Mortgage Arrearage

If you are behind on your home mortgage but want to keep the home, you can file a Chapter 7 case and try to work out the terms for catching up on the mortgage directly with your lender. But you are at its mercy regarding how much time you will have to do so. Your bankruptcy attorney likely has a good idea what your particular lender will allow in your circumstances, but you don’t have much leverage if your lender wants you to pay faster than you can afford.

In contrast, similarly to what we said above about support arrearage, Chapter 13 will give you three to five years to catch up on unpaid mortgage payments. So, if you are too far behind to be able to catch up within the time your lender would give you under Chapter 7, then you can get the time and protection you need under Chapter 13.

 

Keeping Non-Home Real Estate through Bankruptcy

Whether you can keep other real estate depends first on whether it’s “exempt.”

                                       

Most people thinking about filing bankruptcy either don’t have any real estate or if they do it’s their home. But if you own real estate other than your home you’re really not that unusual. You may have property you bought as an investment or as part of operating a business. Or you may have received it in an inheritance or through divorce. You’re in financial trouble and need help, but if you go through bankruptcy you’d like to keep this property. Can you?

Real Estate with or without Equity

The first issue is whether the real estate is protected from being liquidated for the benefit of your creditors.

Outside of bankruptcy if you fall behind with any one of your general creditors it can sue you, likely get a judgment against you, put a judgment lien on all your real estate, and force its sale to pay the debt. Filing bankruptcy would stop that process at any point. But what happens next depends on 1) whether the real estate has any equity (any value beyond the amount of debt(s) secured by this real estate); 2) if it does have any equity whether that equity is “exempt” or protected; and 3) whether you file a Chapter 7 or Chapter 13 case.

1) No Equity or Very Low Equity: If the real estate has no equity, a Chapter 7 or 13 trustee will understandably not be interested in liquidating it to pay the proceeds to the creditors. Same thing if there is so little equity that the costs of sale would eat up that equity without a meaningful amount left over for creditor distribution to make the effort worthwhile.

2) Exempt Equity: Even if there is some equity, it may be “exempt”—covered by any property exemption that applies. Exemptions are categories of assets, usually up to a certain dollar limit, that are protected from creditors and from the bankruptcy trustees. Exemption amounts can vary widely from state to state. So you need to discuss this with your local experienced bankruptcy lawyer.

In addition, often there are “wild card” exemptions that can be applied to anything you own, such as to your real estate equity even if that real estate isn’t your home and you don’t need that “wild card” exemption for other assets. Also, if you don’t use your homestead exemption on your home—either because you don’t own a home or it has no equity needing protection—you may be able to apply all or part of that homestead exemption to your real estate.

3) Protecting Non-Exempt Equity through Chapter 13:  Even if there is equity in your non-home real estate that is NOT “exempt,” you can often protect that equity through Chapter 13. You do this by paying enough into through your Chapter 13 payment plan over its 3-to-5-year lifespan so that your creditors get paid enough. That often requires paying more over time than if you were not keeping and protecting the real estate. But sometimes this does NOT require you to pay any more than otherwise. Again, talk to an experienced bankruptcy lawyer to learn how this would work in your situation.

Surrendering Your Real Estate

If after all this you’re instead inclined to surrender your non-home real estate, there is more to this decision than you might think. We’ll cover this in our next blog post in a couple days.  

 

Addressing a Child or Spousal Support Lien through Bankruptcy

A support obligation is a very special kind of debt, and the resulting lien on your home has to be dealt with in a very special way.

 

Support—A Very Special Debt

If you are behind on child or spousal support then you owe a debt that is treated differently both outside and inside bankruptcy.

Before you file bankruptcy, your ex-spouse and support enforcement agencies have very aggressive tools they can use against you, your income, and your assets to try to make you catch up on unpaid support.

If you own a home, those tools include a lien that is very likely imposed on your home’s title in the amount that you owe.

Some of the support collection tools that can be used against you, including the support lien on your home, are affected when you file bankruptcy and some are not. It depends on the circumstances and especially on whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” Chapter 13 gives you a much more powerful way to fight back.

Chapter 7 vs. Chapter 13

Chapter 7 “straight bankruptcy” is not able to directly help with support debts. All it can do is write off all or most of your other debts. Then you would likely be better able to pay your ongoing monthly support, and also catch up on the unpaid back support.

But both during and after a Chapter 7 case you would have no protection from collection actions against you for the unpaid support. Any lien that you might have on your home for the unpaid support would remain on the title throughout that time. You would have no protection from actions against your home under that lien, including potentially a forced sale of the home to pay the debt.

In contrast Chapter 13 does stop your ex-spouse’s or support enforcement agency’s collection of unpaid support. A Chapter 13 payment plan that you propose with your bankruptcy lawyer specifies how you’re going to catch up on the unpaid support over a period of as long as 5 years. This payment plan is based on your real budget. So it can give you a very flexible way to catch up on what you owe.

Very importantly, unlike Chapter 7, as soon as you file your Chapter 13 case you get protection from collection of the support that is unpaid as of that date. This includes collection actions on the support lien on your home. So you can escape the huge pressure that these aggressive creditors put on you.

Chapter 13 Conditions

These Chapter 13 benefits have important conditions and limits.

Chapter 13 DOES protect you and your home from the collection of the part of support that you are behind on as of the day your case is filed. That’s what you have up to 5 years to catch up on (although it’s often paid faster to get it out of the way).

But Chapter 13 does NOT stop collection of ongoing monthly support payments (assuming that you continue to owe them). So you have to continue paying ongoing support.

It’s extremely important that you DO you pay those regular monthly payments during your Chapter 13 case. That’s because if you don’t keep making those ongoing support payments you could easily lose the protection Chapter 13 otherwise provides you against collection of the support that was owed as of the date your case was filed. You have to pay your ongoing support or else your ex-spouse and support enforcement agency would have grounds to resume collection action on that support arrearage. That would likely include the ability to foreclose on the lien against home, plus all of the other aggressive collection actions the law allows.

It’s also extremely important to keep up on the monthly “plan payments,” the amount you have agreed to pay monthly to the Chapter 13 trustee to distribute to your creditors. Those payments include money earmarked for catching up on the unpaid support. So if you don’t make any of those Chapter 13 payments, the trustee, your ex-spouse and/or support enforcement agency could inform the bankruptcy court that you are not catching up on the support payment as agreed. Then you could lose the protection you’d filed the Chapter 13 case to get.

But the Benefits Make this Worthwhile

The protection and flexibility provided to you by Chapter 13 really is extraordinary.

During your Chapter 13’s 3-to-5-year payment plan, you usually pay only a part of your overall debts. You often pay only a relatively small part of most of your debts so that you can focus on certain more important ones, such as the support arrearage. You may even pay nothing on most of your debts so that you can pay one or a few other debts.

As mentioned above, you are usually given the entire length of your case to catch up on your support arrearage. The amount of time is huge compared to what most ex-spouses and support enforcement agencies would otherwise allow.

You also generally can pay other important debts—such as unpaid home mortgage and/or vehicle payments—ahead of or at the same time as you are catching up on support.

The amount that you pay to catch up on support during your Chapter 13 case often just reduces dollar-for-dollar the amount you pay on most of your other debts. That’s because in most cases the amount you pay each month, and therefore the total you pay over the life of your payment plan, is based on what you can afford to pay. With usually a fixed amount going towards all of your debts, what you are paying to catch up on support just reduces how much you pay on most of your other debts.

Again, as long as you continue doing what you need to be doing, your ex-spouse/support enforcement can’t enforce the support lien nor take any other action to collect the support arrearage. Then at the end of the case you will be current on your support, and the lien will be released from your home.

 

Dealing with Statutory Liens on Your Home in Bankruptcy

Bankruptcy cannot remove contractor’s liens or other statutory liens from your home, but both Chapter 7 and 13 can help you deal with them.

 

A bankruptcy “discharge” legally and permanently wipes out your personal liability for most debts.

But it doesn’t automatically remove liens from your home. Each different type of lien is dealt with differently in bankruptcy, so it can certainly be confusing. The blog posts of the past three weeks have been about these difference, regarding liens securing first and second mortgages, property taxes, income taxes and judgments.

Today we’re talking about a category that does not get much attention on bankruptcy lawyer’s websites, “statutory liens.”

What’s a “Statutory Lien”?

The Bankruptcy Code defines a statutory lien as a lien “arising solely by force of a statute.” See Section 101(53).

A “lien” is an interest in property—in our situation, an interest in your home—that secures payment of a debt. (Section 101(37).) It’s what turns a debt that is not secured by anything you own into a debt that is secured by your property—your home.

A statute is a written law based by a legislative body—mostly federal or state.

Statutory liens exclude “judicial liens,” which arise out of a lawsuit and its judgment, commonly called judgment liens. See our two last blog posts about them.

Statutory liens are not generally created voluntarily, by agreement, like a home mortgage or vehicle lien when you finance its purchase.

So, essentially statutory liens are created automatically by operation of a statute.

Some Common Statutory Liens

Most statutory liens are created by state law, so they vary from state to state. The main ones that apply to homes are:

  • Mechanic’s lien. This is a broad term for liens on your home for contractors, laborers, or suppliers if you don’t pay for the construction or materials used to improve the home.
  • Income Tax lien. These are liens imposed by the IRS under federal law and by state and local taxing authorities under state law for unpaid tax obligations. These come up so often and have so many special twists that we dedicated four recent blog posts to them (from May 23 through 30).
  • Homeowners’ Association lien. If you don’t pay the fees or any special assessments owed to your homeowners’ association in most cases a lien will usually automatically attach to your property. In certain states homeowners’ association liens are given “super lien” status, meaning that they get paid ahead of the mortgage and certain other liens. 

No “Avoiding” of Statutory Liens

Both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” allow you under certain circumstances to “avoid” judgment liens, to release them from your home’s title. See Section 522(f) of the Bankruptcy Code. As a result the judgment debt that was secured by your home through the judgment lien again becomes an unsecured debt. Then usually you can discharge the underlying debt, owe nothing, and have no lien on your home.

You can NOT do this with statutory liens. The lien survives your bankruptcy case, and remains on your home.

How Chapter 7 Can Help

“Straight bankruptcy” can help you deal with statutory liens in only limited ways. Mostly, it can discharge other debts so that you can start focusing your attention and as needed your financial resources on paying off the statutory lien.

So, for example, if you owe a home repair contractor on a roof job and you’re in a dispute with him or her about the quality of the job or other terms of the contract, getting rid of most of your other debts lets you concentrate your time and money on this. You’ll better be able to come to a fair settlement and then pay off any remaining obligation as quickly as possible.

How Chapter 13 Can Help

The Chapter 13 “adjustment of debts” version of bankruptcy gives you more leverage. You generally can put together a payment plan to address all of your debts, one which could highly prioritize the one secured by the statutory lien. But if you had other even more urgent obligations (such as back payments on a home mortgage, vehicle payments, or child support) you would usually have much more flexibility in dealing with the debt with the statutory lien than under Chapter 7.

In the example of the debt owed to the roof contractor, your court-approved Chapter 13 plan could likely front-end payments to the contractor to pay off that debt as quickly as possible. Or under certain circumstances—such as if there was plenty of equity in your home to cover the contractor’s lien—you could drag that perhaps as long as 5 years so that you could pay other urgent debts earlier.

In general determining how much you can manipulate payment of statutory liens in Chapter 13 bankruptcy gets quite complex and depends on many factors. Be sure to discuss your options fully with a knowledgeable bankruptcy attorney.

 

Your Simple Debts, Your Complicated Debts

Chapter 7 gives you a fresh financial start by legally erasing most of your debts. That’s great if your debts are simple ones.

 

Simple Debts and Complicated Ones


You have debts that are overwhelming you. If you go through a procedure called Chapter 7 “straight bankruptcy,” in about three months all or most of your debts would be gone. They would be discharged,” written off forever. You’d have a fresh financial start.

But often life is more complicated than that.

You may have special debts that you don’t want to write off, like your home mortgage or your vehicle loan because you want to keep your home or your vehicle. But you may be behind on those payments and need extra time to catch up.

Or you may have debts that you can’t erase, like your child support or certain taxes. You need help dealing with them.

Secured Debts

Secured debts that are those whose payment is secured by something you own, like your home, vehicle, or furniture. Usually you’ll know if a debt is secured, but sometimes it’s not clear. For example, sometimes your debt for purchases of furniture, appliances, electronics and such are secured by what you bought, sometimes they’re not. Some cash loans are secured by collateral while others are not. Most credit cards are not secured but some are.

Secured debts can often be handled in a Chapter 7 case. It depends on whether you want to keep the property securing the debt, whether you are current on the payments, and how much you owe compared to the value of what is secured. As you’ll see in some upcoming blog posts, there’s much more to secured debts than whether the debt will be discharged.

Non-Discharged Debts

As you’ve heard, not every kind of debt can be discharged in a Chapter 7 bankruptcy.

Broadly speaking, there are two kinds. First are those that don’t get discharged regardless whether the creditor does anything about it or not. Second, those that do get discharged unless the creditor objects during your bankruptcy case.

The first kind, in which the creditor doesn’t need to complain, includes child and spousal support, and certain income taxes, among others. The second kind, in which the creditor has to complain to avoid discharge, and to do so by a strict deadline, includes bounced checks, credit card advances and purchases shortly before filing bankruptcy, among others.

Your bankruptcy lawyer will be able to tell you in advance whether you have any debts of the first kind. But he or she will not necessarily be able to tell about the second kind. That’s because with those you have to wait to see if the creditor is going to raise an objection or not. But even with those often your lawyer can have a good idea whether there’s a risk that a creditor will object, based on whether it may have legal grounds to do so.

If you have any non-discharged debts of either kind, how much you have, and how such debt would be treated under Chapter 7 vs. Chapter 13 influence whether bankruptcy is an appropriate solution for you, and if so under which Chapter to file.

Conclusion

If all of your debts are unsecured and should be discharged in bankruptcy, you will tend towards filing a Chapter 7 case. Even if you have some secured and/or non-discharged debts, Chapter 7 may still work, depending on how large they are and how cooperative the creditors.

Chapter 13 is often the better solution if you have a lot of secured and/or non-discharged debts, and/or their creditors need to be legally pushed beyond what they would voluntarily do.

The next few blog posts will look at how both Chapters can help you with these more complicated types of debts.