Chapter 7’s Shortcomings in Saving Your Home, Solved by Chapter 13

Here’s a detailed example bringing to life ways that Chapter 7 just doesn’t help nearly enough, but Chapter 13 does.

 

In the last two blog posts we gave you a list of 10 major ways that a Chapter 13 “adjustment of debts” case can help you keep your home. But as well as we try to explain each of these, they make much more sense whey we show how they actually work by way of an example. So here we go.

The Example

Consider the following person, a single woman named Amy:

  • She was let go from a long-time job in early 2011, did only part-time or temporary work for a long time until finally finding a decent full-time job 6 months ago. But it pays a little less than her old job.
  • While she was not working full-time Amy exhausted her savings and then, because she felt she had no choice, used her credit cards to make mortgage payments. She currently owes $20,000 in credit cards.  
  • After maxing out her credit cards Amy fell $6,000 behind on her first mortgage and $2,500 behind on her second. Those mortgage lenders are both threatening to foreclose.
  • She has not paid her last annual property tax bill of $2,250. Her first mortgage lender is demanding she pay this in full immediately, because this jeopardizes its own security in the home.
  • Amy had some medical issues while she was between jobs and had no health insurance, so she owes $5,000 in medical bills. A collection agency sued her a few months ago, so she now has a $5,000 judgment lien against her home.
  • Amy owes $2,500 to the IRS for 2010 income taxes, interest and penalties. She couldn’t make her monthly installment payments, and so the IRS recently recorded a tax lien against her home.
  • She also owes the IRS $2,000 for each of the 2011, 2012, and 2013 tax years, a total of $6,000, because money was so tight those years of irregular work that she didn’t have enough taxes withheld.
  • Amy’s home was worth $320,000 back before the Great Recession, lost about 30% of its value, and is now still only worth about $250,000. She owes $265,000 on the first mortgage, with monthly payments of $1,100 (with insurance and property taxes), and owes $45,000 on the second mortgage, with monthly payments of $250.
  • She hopes to stay in her home because she has a son who started high school last year, he is doing well there, and she would not be able to find other affordable housing within the same school district.
  • Amy now has a pretty reliable income. After she pays modest but reasonable living expenses, she has $1,500 available each month to pay ALL her creditors, including the two mortgages. That’s only $150 per month beyond the two regular mortgage payments, nowhere near enough to pay all her debts. In summary they include:
    • credit cards: $20,000
    • 1st mortgage arrearage: $6,000
    • 2nd mortgage arrearage: $2,500
    • property tax arrearage: $2,250
    • medical debt judgment lien: $5,000
    • 2010 income tax with tax lien: $2,500
    • 2011, 2012, and 2013 income tax: $6,000

That’s a total of $44,250, besides the $265,000 first mortgage and the $45,000 second mortgage.

What Would Happen in a Chapter 7 “Straight Bankruptcy”?

If Amy filed a Chapter 7 case, that would help her somewhat by discharging (legally forever writing off) tens of thousands of dollars of her debts. She would most likely no longer owe any of the credit card debts, nor the judgment from her medical debts, nor likely even her 2010 debt to the IRS (although that is complicated by the lien on her home securing that tax debt).

But discharging these amounts, totaling $27,500, would not be nearly enough to enable to keep her home. It still leaves her with mortgage and property tax arrearages totaling $10,750, plus $6,000 in income taxes that a Chapter 7 case would not discharge (because they are too recent). With just only $150 to spare after paying the current first and second mortgage payments, that’s way too small to even begin to satisfy her mortgage holders and the IRS.

So after Amy’s Chapter 7 case would be completed (only about 3 or 4 months after its filing), at some point her home would be foreclosed because of the mortgage and property tax arrearages. The IRS would likely attempt to collect the 2011-2013 income taxes through garnishments of her paychecks or bank accounts, and likely new tax liens recorded on her home, if she still owned it at the time.

Clearly, Chapter 7 doesn’t help Amy meet her goal of keeping her home.

Chapter 13 Salvation

But if Amy instead filed a Chapter 13 case, under these same facts she would actually be able to keep her home. Before her case was over, she would be able to get completely current on her home obligations, including the property taxes, and she would either discharge or pay her tax obligations. She would do all this while she, her paycheck, her home and all her other assets were protected from future tax liens and any other collection efforts by any of her creditors. At the completion of her case she would be completely current on all home obligations and be otherwise completely debt-free.

How could she do all that with only $150 to spare in her budget? Through some powers that are available only under Chapter 13. I’ll describe how they work in Amy’s situation in my next blog post.

 

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.

 

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.

 

Five Tremendous Tools to Save Your Home through Chapter 13

Powerful Chapter 13 gives you tools to solve your mortgage and other home lien problems from a number of different angles. 

 

The Limits of Chapter 7 “Straight Bankruptcy”

In my last blog I described how a Chapter 7 case can under certain circumstances help you enough to save your home. Or in other situations it can at least help you delay a foreclosure for as long as you need.  But Chapter 7 can only give limited help, maybe enough if you aren’t too far behind on your mortgage circumstances, or you don’t have other kinds of lienholders causing problems.

The Extraordinary Tools of Chapter 13

Chapter 13, on the other hand, provides you a range of much more powerful and flexible tools for solving many, many debt issues so that you can keep your home.

Here are the first five of ten significant ways that Chapter 13 can save your home (with the other five to come in my next blog).

Under Chapter 13 case you can:

1.  stretch out the amount of time for catching up on back mortgage payments for as long as 5 years. This is in contrast to the one year or so that most mortgage lenders will give you to catch up if you do a Chapter 7 case instead. This longer period can greatly lower your monthly catch-up payments, making more likely that you would succeed in actually catching up and keeping your home. Very importantly, throughout this catch-up period your home is protected from foreclosure as long as you stay with the payment plan, one that you propose. Within limits you can later modify that plan if your circumstances change.

2. slash your other debt obligations so that you can afford your mortgage payments. The mortgage debt—especially your first mortgage—can’t be significantly changed under Chapter 13. So you are usually required to pay your full monthly mortgage payment, and to catch up any arrearage, but to accomplish this you are allowed to pay to most of your other debts.

3.  permanently prevent income tax liens, and child and spousal support liens, and such from attaching to your home. The “automatic stay” preventing such liens under Chapter 7 last usually only about 3 months, and there’s no mechanism for dealing with these kinds of debts. Instead under Chapter 13, these liens are prevented throughout the three-to-five-year length of the case.

4.  have the time to pay debts that can’t be discharged (legally written off) in bankruptcy, all the while being protected from those creditors attacking your home. So even if a tax or support lien is already in place before you file, you are given the opportunity to pay the debt while under the protection of the bankruptcy laws. That undercuts the leverage of those liens against your home. Then by the end of your case, the debts are paid and those liens are released.

5.  discharge (write off) debts owed to creditors which could otherwise attack your home. For example, certain (generally older) income taxes can be discharged, leaving you owing nothing. But had you not filed the Chapter 13 case, or delayed doing so, a tax lien could have been recorded, which would have required you to pay some or all of the balance to free your home from that lien. Even most standard debts can turn into judgment liens against your house once you are sued and a judgment is entered. Depending on the facts, a judgment liens may or may not be able to be gotten rid of in bankruptcy.  If instead you file a Chapter 13 case to prevent these liens from happening, at the end of your case the debt is gone, and no such liens attach to your home.

See my next blog post for the other five house-saving tools of Chapter 13.

 

Good Reason to Delay Filing Bankruptcy until Now: To Get More Anti-Foreclosure Bang for Your “Automatic Stay” Buck

Timing your bankruptcy filing right can give you more time in your home before surrendering it to your lender.

 

Make Sure You Really Need or Want to Surrender Your Home

Bankruptcy can be a very effective tool in saving your home from a pending or threatened foreclosure. Chapter 7 “straight bankruptcy” can permanently discharge (legally write off) all or most of your other debts so that you can concentrate your financial resources on your home. Chapter 13 “adjustment of debts” can give you years to catch up on back mortgage payments, may “strip” a second mortgage off your home’s title, and give you a very effective way of dealing with judgment, tax, and other liens on the home.

So if you have resigned yourself to giving up your home but have not yet talked to a bankruptcy attorney about your options, there’s a chance that you could stay in the home after all.

But You May Indeed Be Ready to Leave

In spite of all the potential benefits of Chapter 7 and Chapter 13, for lots of reasons hanging onto your home may not be your best option.

But be sure to make that decision with the help of an experienced and conscientious bankruptcy attorney, for two reasons:

  1. You simply can’t assume that you understand your legal options—about keeping your home or about anything else related to your debts and finances—without getting legal advice about them. Your financial life—whether seemingly simple or complicated—involves numerous legal issues, some of which you may well not even be aware of, much less have a clear understanding about. It is only sensible to get the counsel of someone who has spent many years of training and experience preparing to help you with your own unique situation.
  2. You very likely have better and worse ways to surrender the house. So it is often extremely worthwhile to get legal advice about the best game plan for the surrender. Today’s blog post addresses this about timing, but it can only do so in general terms. Again, you need your own attorney to familiarize him or herself with your unique situation and to work with you to create your personal game plan.

The Power and Limitations of the “Automatic Stay”

The “automatic stay” of bankruptcy is the protection you and your assets receive from your creditors the moment you file your bankruptcy case (either Chapter 7 or 13—or the more unusual Chapter 11 or 12 for businesses, farmers, and fishermen). It is this protection which stops a foreclosing mortgage lender from proceeding with a foreclosure, at least for a limited time.

This stopping of a foreclosure and potential prevention of a newly scheduled foreclosure is effective as long as the bankruptcy case is open, or more precisely, until the bankruptcy court grants a discharge (legal write-off) of debts. That happens about 3 to 4 months after the filing of a conventional Chapter 7 case and 3 to 5 years after the filing of a Chapter 13 case. So at the very least, the mortgage lender can resume foreclosing after the automatic stay is no longer in effect.

But the automatic stay protection can be cut short by being challenged by the mortgage lender. It can file a “motion for relief from stay” or “motion to lift stay,” and can do so at any time after the filing of your bankruptcy case. This is especially likely to happen if you show no intent to pay for and keep your home.

As a result, how long you can stay in your home depends on the aggressiveness of your mortgage lender in filing such a motion, and on state laws about how quickly the foreclosure procedure could be re-started and completed. (This is true whether the foreclosure is a non-judicial one by “notice and sale,” or a judicial one involving a lawsuit.)

Taking Maximum Advantage of the Automatic Stay Protection

If you want to maximize how long you can be in the home (so that you can save money for your move), usually you don’t want to file your bankruptcy case too early, long before your scheduled foreclosure sale or court date. That’s because if you do, your mortgage lender may be able to file its motion and get the court to lift the automatic stay BEFORE the scheduled foreclosure sale or court date, and thus allow that sale or court hearing to take place.

This would gain you no additional time at all. That’s fine if you are ready to move, but not if you need more time to scrape up money for first and last months’ of rent, a security deposit, moving expenses and such.

It’s usually better to wait to file until right before the foreclosure sale or court date, to ensure that the foreclosure is stopped. But that’s not necessarily the best time.

The precisely best time to file to gain the most time depends on your state’s foreclosure laws and on the specific facts of your case. For example, some state’s laws allow for a quicker follow-up foreclosure after getting relief from stay IF the initial foreclosure procedure went past a particular step in the procedure. So your bankruptcy filing may actually buy you more time if it is filed earlier, before that step in the procedure, thus making the resumed foreclosure procedure take longer.

A Lesson in the Benefits of Legal Advice

Notice the references in the last several paragraphs to state foreclosure law. Bankruptcy and the automatic stay are federal law. Foreclosure—and property rights in general—are governed in most respects by state laws. Figuring out the best game plan for you in the midst of the interplay between these two systems of laws is not for the dabbler in the law. Forgive the repetition, but for this and all the reasons given above, be sure to see a competent bankruptcy attorney to determine your best course forward when you are surrendering a home and want to have sufficient time before being forced to move.

 

Start the New Year by NOT Paying Your Second Mortgage and Getting Your Home Much Closer to NOT Being Under Water

If you still owe much more on your house than what it’s worth, you may be able to “strip” a second or third mortgage off your title.

 

To Be More Precise…

If you want to follow up on your New Year’s resolution to improve your financial life, and IF your home is worth about the same or less than your first mortgage, AND if you have a second and/or third mortgage, you can meet that resolution by taking one crucial step.

This one step would save you lots of money immediately, and then do so every month for years to come. It would not only help your immediate and long-term cash flow, this step would in effect create wealth for you, by making your home worth closer than what you owe on it. This means that as your home’s value increased, you would be building equity in it many years sooner than you would otherwise. In the long run, this step would likely save you many tens of thousands of dollars.

To Be Really Precise…

We’ll show how this works with an example, and then explain it a little more afterwards.

Consider a house that 6 years ago was worth $285,000, is now worth $200,000, with a first mortgage of $210,000, and a second mortgage of $50,000.  Assume further that the monthly payment on the first mortgage is $1,500 and on the second mortgage is $350. The homeowners have fallen behind by 10 payments on both mortgages, so are behind $15,000 and $3,500, respectively.

Assume as well that the homeowners owe $5,000 in last year’s income taxes, and $40,000 in all other unsecured debts including credit cards and personal loans. The homeowners have steady income which would enable them to pay a total of $2,000 per month to all of their creditors, or $500 beyond the regular first mortgage payments of $1,500. This $500 per month would pay the $350 second mortgage payment but leave only a measly $150 per month for everything else—for catching up on the mortgages, and for paying the $5,000 in income taxes and the $40,000 in other unsecured debts. This is clearly not a sustainable situation. These homeowners are about to lose their home.

But a Chapter 13 filing would solve this seemingly impossible set of problems, on both a short-term and long-term basis. Because the house is currently worth less than the balance of the first mortgage ($200,000 vs. $210,000), the $50,000 second mortgage can be “stripped” from the home’s title. (Note that a Chapter 7 “straight bankruptcy” does NOT provide this huge benefit.)

The homeowners would resume making their first mortgage payment, but not their second mortgage one. The remaining $500 per month would be paid into their Chapter 13 plan for 5 years (the length of their plan being based on their income), for a total of $30,000 ($500 times 60 months). That $30,000 would go to pay the $15,000 in first mortgage arrearage and the $5,000 in income taxes, leaving $10,000. That would be divided among the pool of remaining debt totaling $90,000, the second mortgage balance of $50,000 plus the $40,000 in “general unsecured” debts, paying about 1/9th or about 11% of that $90,000. (These calculations exclude trustee and attorney fees for the sake of simplicity.)

The result is that these homeowners would pay (besides the payments on their first mortgage) a total of $30,000, instead of what they would otherwise have to pay $110,000 ($15,000 first mortgage arrearage + $5,000 income tax + $50,000 second mortgage + $40,000 “general unsecured” debts). This is a savings of $80,000.

The actual savings would be much more because the above doesn’t account for all the interest that would have to be paid on the second mortgage if it were not “stripped.” The true amount would depend on how long the homeowners would stay in the house.  Interest makes up a large amount of what is paid on a mortgage, the exact amount depending of course on the interest rate and length of the loan. Just by way of example, a $50,000 second mortgage at 6% interest and $350 payments would take about 21 years to pay off, accruing nearly $38,000 in interest.

So instead of these homeowners likely losing their home, after five years in a Chapter 13 case they would be current on their first mortgage, would have paid off their income taxes, would no longer owe a dime on their second mortgage and would be debt-free except their first mortgage. This is quite a nice reward for following through on their New Year’s resolution to see a bankruptcy attorney!

To Summarize, “Stripping” the Second Mortgage Means…

  • You would not have to pay the monthly payments on the second mortgage starting immediately after your Chapter 13 case is filed.
  • If you were behind on the second mortgage, you would never have to catch up on it.
  • The entire second mortgage balance would be treated as a “general unsecured” debt—just like your unsecured credit cards, medical bills, and other miscellaneous debts—meaning it would be paid only as much as your budget would allow within the 3 to 5 years that your Chapter 13 case is open, often only pennies on the dollar.
  • Other important debts— such as your vehicle, first mortgage arrears, child and spousal support arrears, and recent income tax debts—take priority over your second mortgage debt, a portion of which would therefore be paid only after paying these higher priority debts in full.
  • After your 3-to-5-year case is completed, however much you have not paid of the second mortgage balance (usually a large majority of that balance) would be discharged (forever legally written off).
  • The lien on your home’s title that is tied to your second mortgage would be permanently removed.
  • BOTTOM LINE: You’d likely save many tens of thousands of dollars and end up with a home much less under financial water.

 

Practical Bankruptcy: Stopping Your Home’s Foreclosure to Keep it, or Sell it later, through Chapter 13

When it’s smart to file a 3-to-5-year Chapter 13 case to prevent a home foreclosure and be able to keep it permanently, or to sell it later.

What Chapter 13 Can Do?

For good reason Chapter 13 “adjustment of debts” is called the “save your home” bankruptcy option. It gives you so many advantages towards that goal. A Chapter 13 case can:

  1. give you three to five years to catch up on your arrearage, greatly reducing the monthly cost of catching up, making it much more feasible to hang onto your home
  2. allow you to “strip” your second (or third) mortgage off your home, saving hundreds of dollars per month and usually tens of thousands (or sometimes even hundreds of thousands) of dollars over the time you keep the home
  3. enable you to take care of other liens on your home—such as back property taxes, income tax and child support liens—usually in a very favorable way
  4. protect any equity in your home beyond the applicable homestead exemption
  5. reduce or even eliminate what you pay to many of your other creditors so that you can focus on preserving your home
  6. allow you to pay other very important debts—such as your vehicle loans, income taxes, child and spousal support and arrearage—in tandem with or sometimes even ahead of your home arrearage payment
  7. “avoid” judgment liens, taking them off your title and then discharging the debts that caused those liens (also available under Chapter 7)
  8. allow you in many circumstances to sell or surrender your home whenever you choose to do so, whether you planned to do so at the beginning of the case or because your circumstances change
  9. throughout the process not only protect your home from foreclosure by your mortgage lenders, but also prevent new liens attaching to your home, such as for previously unpaid income tax or child support

Our Example

Let’s illustrate how to save a home under Chapter 13 with an example. To keep the story manageable, it will only include the first three in the list above.

Jerry owns a home that was worth $310,000 in 2006, but is now worth $250,000. He owes $255,000 on his first mortgage, and $35,000 on his second mortgage, is significantly behind on both, and just missed paying his annual property tax of $2,000.

Long-divorced, he shares custody with his 16 year old son, who thinks he wants to enlist in the Navy as soon as he turns 18. At that point Jerry would like to move to another part of the country where job opportunities are better for his line of work. He currently has steady work, but the last three-four years has been really rough financially. He owes:

  • $28,000 in credit cards
  • $12,000 for medical bills incurred while he was unemployed and uninsured
  • $3,000 in federal income taxes from 2009 when he did not have enough withheld from his wages; he knew he owed so he didn’t file this tax return until last year, and the IRS just recorded a tax lien on it
  • $2,000 in back property taxes on his home
  • $8,000 in arrearage on his 1st mortgage
  • $3,000 in arrearage on his 2nd mortgage

The Chapter 13 Solution

Jerry tells his bankruptcy attorney about his hope to move in two years, but he’s not sure if his son might not change his mind about joining the military. If not, he might still want to keep his home in case his son needs to stay there. So he’d like to keep his options open, in part also to see whether his home’s value will keep on edging up as it finally seems to be doing. His attorney advises him to file a Chapter 13 case. He agrees, and it accomplishes the following:

  1. Jerry has five years to catch up on the $8,000 in first mortgage arrearage, so though his Chapter 13 plan he pays about $150 per month towards that. If instead he’d filed a “straight bankruptcy” Chapter 7 case, most likely his lender would have required him to catch up within a year, amounting to payments approaching $700 a month, which Jerry simply could not have paid.
  2. His attorney successfully files a motion to “strip” the second mortgage off his home, which can be done because the home is worth less than his first mortgage. In addition to saving Jerry the monthly payment of $310 dollars per month, he avoids paying the $3,000 in arrearage. And maybe most importantly, this brings his debt on the home much closer to its value.
  3. He has to pay both the $2,000 back property taxes and the $3,000 in income taxes, but he would have had to no matter what, including if he had filed a Chapter 7 case. The property tax is a lien on his home that comes even ahead of his first mortgage. Being behind on that also gives his mortgage lender another reason to foreclosure if he doesn’t take care of it. The income taxes have to be paid in full because he filed the returns less than two years ago. But he doesn’t have to pay any additional interest or penalties because the income tax lien was unsecured, since there was no equity in the home beyond the first mortgage.  Both the property and income taxes are put into Jerry’s Chapter 13 plan, the total payment amount for which is based on his income and expenses.
  4. The $40,000 of his other debts—$28,000  in credit cards and $12,000 in medical bills—as well as his second mortgage balance of $35,000, do not have to be paid anything as long as Jerry can only afford to pay the obligations stated above within the plan’s five years (and sometimes it’s as short as three years).
  5. In two years when his son turns 18, Jerry can keep the Chapter 13 plan going as originally proposed and approved, and continue living in the home. If so, when he finishes his case, he will have caught up on his first mortgage, paid off his back property and income taxes, and owe no other debts. Or at the two year mark, he would likely be able to sell the home and move, at which point his plan could be amended to account for his changed circumstances. Or instead, depending on his circumstances at that point, he could convert his case into a Chapter 7 one, discharge his debts and be debt-free that much faster. 

Practical Bankruptcy: Stopping the Foreclosure of Your Home and Keeping It Through Chapter 7

Do you really have to file a 3-to-5 year Chapter 13 case to stop a foreclosure of your home and then be able to keep it permanently?

 

Avoiding Chapter 13?

Chapter 13 “adjustment of debts” is often considered the “save your home” bankruptcy option because of all the advantages it can provide towards that goal. But what if most of those advantages do not apply to you? Is there ever a situation where you can save your home simply by filing a Chapter 7 “straight bankruptcy” instead?

After all, Chapter 13 certainly comes with disadvantages, starting with the fact that it takes several years to complete—instead of just the three, four months that a Chapter 7 usually takes. Probably the most important downside is that you have to successfully complete a Chapter 13 case to get a discharge (legal write-off) of any of your debts. Lots of things can change in three to five years. Although Chapter 13 is designed to handle a certain amount of change in your life, there are some limits in its flexibility. So in this respect it is inherently riskier than Chapter 7.

When Chapter 7 May Be Sufficient

As a general rule of thumb you do not need a Chapter 13 case if:

  1. after filing a Chapter 7 case you could afford to catch up on any mortgage arrearage within about a year
  2. you do not have a second mortgage, or if you do your house is worth at least the amount of the combined first and second mortgage balances

1. If you are behind on your payments and you file a Chapter 7 case, you will likely be given a certain amount of time to bring your payments current. How long depends on your mortgage lender and your specific circumstances. About a year to catch up is the limit for many. To find out how much time you would likely have, talk with your attorney, who may well have experience with your lender or can find out by contacting it directly.  

Then a very careful assessment needs to be made of how much extra you can pay each month—once you file a Chapter 7 case and no longer need to pay the debts that you expect to discharge. This should give a decent estimate how long it would take you to get current, and whether you could realistically do so.

2. Under Chapter 13 (and NOT Chapter 7) you can “strip” the entire second mortgage off your home’s title if the house’s value is less than the balance of your first mortgage. In other words, this works if all of the home’s equity is encumbered by the first mortgage. This can save SO much money—tens of thousands of dollars, or even sometimes hundreds of thousands in the long run—that anybody with a second mortgage and the indicated equity posture just mentioned should seriously consider Chapter 13. (If the house is worth more than the amount of the balance of the first mortgage but less than the combined first and second mortgage balances, the only PART of the second mortgage can be stripped. Whether doing a Chapter 13 under this situation is worthwhile depends on the details of the case.)

Our Example

Let’s illustrate saving a home under Chapter 7 with an example.

Sue and Frank are a married couple in their 50s. They were in an automobile accident two years ago which injured both of them and left Frank temporarily disabled and unable to work for 18 months. The other driver was at fault but had no insurance, and their own uninsured insurance benefits paid out its coverage limits leaving them personally liable for $70,000 in medical bills. They were also unable to pay their other bills. These included credit card balances totaling $40,000 resulting from “living on credit cards” while Frank was not working when they simply had no other way to keep bread on the table, pay their health insurance premiums, and make their one vehicle payment. They did just succeed in paying off their vehicle loan; they absolutely relied on this older vehicle to get to work and so felt they had no choice.

During Frank’s rehabilitation, they fell six payments behind on their relatively modest mortgage payments of $800 per month, a total of $4,800 in arrears. Their lender has begun to threaten a foreclosure, although no date has been set. They have no second mortgage.

Many of their medical bills have gone to collections, and a number of these have sued them, gotten judgments, resulting in liens on their home, and one just began garnishing Frank’s paychecks. Sue and Frank have also missed payments on most of their credit cards, have been hit with late fees and jacked-up interest rates, and some are threatening lawsuits as well.

The Chapter 7 Solution

Sue and Frank meet with an experienced bankruptcy attorney. After analyzing their situation, the attorney calculates that, if the paycheck garnishments were stopped and they did not have to pay the $110,000 in medical and credit card debts, with their present income Sue and Frank could comfortably make the regular mortgage payments. Indeed, as they look carefully at their budget unburdened by these other debts, and after accounting for the recent payoff of their vehicle loan,  Sue and Frank express confidence that if they squeezed their budget temporarily they could realistically pay an extra $400 or $500 per month towards their mortgage arrearage. That would catch up their arrearage in about 10 to 12 months. Their attorney tells them that their mortgage lender characteristically accepts “forbearance agreements” from homeowners in their situation, giving them up to a year to catch up.

Sue and Frank file a Chapter 7 case, which immediately stops the garnishment, and results in the “avoiding” of the judgment liens on their home. Their attorney negotiates a forbearance agreement with their mortgage lender. The lender agrees to not begin a foreclosure as long as Sue and Frank make the next 12 months of regular payments on time, plus pay an extra $400 per month during those same 12 months. A little more than three months after their Chapter 7 is filed, the bankruptcy court grants them a discharge of all of their medical and credit card debts and closes the case. Another nine months later, Sue and Frank finish paying off their mortgage arrears. They are current on their mortgage and have no other debts. 

 

Practical Bankruptcy: Delaying Your Home’s Foreclosure to Buy Time to Move

Even if you don’t think you can stay in your home, Chapter 7 gives you more time to save money for your move, and may buy some leverage.

 

Both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” give you surprisingly strong tools for dealing with your mortgage lenders. For example, Chapter 13 can sometimes essentially get rid of a second mortgage and give you years to catch up on your first mortgage, even if you are on the brink of foreclosure. So before you make any decisions about giving up your home, you should find out whether bankruptcy could save it after all.

However, if you are facing a foreclosure you may still decide, after getting legal advice about your options, that you should surrender your house. If so, the following example shows how filing a Chapter 7 bankruptcy at the right time can work to your advantage.

Our Example

Trevor and Anna are a married couple who bought their first home at the wrong time. In 2006 they’d been married for 5 years, both had been working for the same employer throughout their marriage, they had saved $25,000 for a down payment, and so they decided the time was right for buying a home.  They bought a home for $250,000, seemingly within their means, owing a single mortgage of $225,000.

But then the Great Recession hit. The home’s value went down and down until just a few years after their purchase it was worth only $180,000.  During this time, Anna’s hours at work were cut back, losing 30% of her income. They cut back on everything else to keep the mortgage current. Then in early 2012, Trevor lost his long-time job. A few months later, they simply did not have enough money for their full mortgage payment, so they sent partial ones. After accepting those for several months, their mortgage lender refused to accept the partial payments, and started threatening to foreclose. They fell way behind on some other debts. After a year of unemployment, Trevor got a new job but one that paid 25% less and is a very long commute from their house. They have not made a mortgage payment for a year, and are in arrears $18,000, including a year of property taxes. They received notice that their foreclosure sale is scheduled for two months from now.

Although property values in their neighborhood have recently stabilized and even gone up a little, Trevor and Anna have no interest in staying in their house. With the arrearage, including late fees and foreclosure costs, and the unpaid property taxes, they owe close to $245,000 on a house still worth no more than $185,000. They can rent for much less than their mortgage payment plus what it would take to catch up on their arrearage. And they’d rather live closer to Trevor’s new job, where Anna has some promising job leads.

More Time to Move and Save for Moving Costs

After hearing from their bankruptcy attorney about what Chapter 13 could and could not do for them and their house, Trevor and Anna decide not to fight to keep it. But they also learn that if they file a Chapter 7 case just before their scheduled foreclosure date, the “automatic stay” of their bankruptcy filing will stop that foreclosure sale. In the meantime, they can save whatever money that they had been paying their other creditors for their future moving costs and rent payments—with appropriate guidance from their attorney to protect that money from their Chapter 7 trustee.

So Trevor and Anna’s bankruptcy is filed and the foreclosure sale is stopped. They have been advised that how much extra time they will be able to stay in their house mostly depends on how aggressive their lender is, as well on the applicable state laws. If the lender is in a big hurry to foreclose, it can file a “motion for relief from stay” at the bankruptcy court asking for permission to reschedule the foreclosure sale. If so, that motion would likely be granted, and the new foreclosure would be scheduled as soon as state law allows it. Under this circumstance, the amount of time gained for staying in the house may be as short as a month or two—which still can be very helpful.

But it’s not unusual for a mortgage lender not be in big hurry to file for “relief from stay.” That could result in Trevor and Anna being able to stay in the home for three, four, or more extra months, giving that much more time for them to keep scraping money together for their moving and rental costs.

In Trevor and Anna’s case, their attorney contacted their mortgage lender because she knew that sometimes it was willing to negotiate a “cash for keys” arrangement. It costs lenders a fair amount in attorney fees and other costs to get “relief from stay” and then to foreclose, so sometimes they are willing to pay their borrower some money in exchange for it getting possession of and title to the house by a certain date. Trevor and Anna knew they would have enough saved for their rental move-in costs within two months after their bankruptcy was filed, so they were happy to get a little extra money to surrender their house at that time.

Besides discharging (legally writing off) all their debts so that they could have the fresh financial start that they needed, they were able to leave their house in a comfortable and orderly fashion. All thanks to a well thought-out and executed Chapter 7 bankruptcy. 

 

Even a Simple Chapter 7 Bankruptcy Can . . . Help You Walk Away from Your Mortgage

Filing Chapter 7 bankruptcy in the midst of letting go of your home can be a smart combination.

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A Chapter 7 “straight bankruptcy” adds the following advantages while surrendering your home to your mortgage lender: gives you more control over the timing of surrender, avoids continuing liability on house-related debts, gives you the leverage and peace of mind of an attorney looking out for you, and gives you a full fresh start when you really need it.  

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Chapter 13—the three to five year partial payment plan—consists of an entire toolbox full of different tools to help people hang onto their homes. But that may not be what you need. After getting informed about how those tools would work (or not work) in your situation, you may decide that it’s best for you to walk away from your home. If so, here are some advantages of doing that in conjunction with filing a Chapter 7 bankruptcy:

  • Have more control over when you leave:

If you have a foreclosure sale date scheduled, or a foreclosure lawsuit pending, usually you would have no say about when you have to leave. You could even be forcibly evicted by county sheriff deputies. However, if you file a Chapter 7 bankruptcy case, that will delay the foreclosure sale or lawsuit, at least for a few weeks, and possibly for a matter of months. That alone could save you a couple thousand dollars in rent. Also, after a bankruptcy filing, your mortgage lender may well be willing to negotiate a departure date convenient to you, in return for avoiding their need to rack up a lot of attorney fees. As part of the deal you may be willing to sign over your title through a “deed in lieu of foreclosure,” with no risk of further liability since your bankruptcy case is discharging any remaining debt.

  • Avoid house-related debt following you:

Depending on your situation, and on your local state laws, after surrendering a house without bankruptcy you risk being saddled with debts coming at you from

various directions. Sometimes you could continue being liable on the first mortgage. If you have a second mortgage and are surrendering the house to the first mortgage holder, you would usually continue owing the full balance on the second mortgage. You could also be liable on other debts related to the home—such as unpaid utilities, contractor liens, income tax liens, or homeowner association dues. Many of these debts would be discharged if you filed a bankruptcy. Those that would not—like certain income taxes—you would have a practical way of taking care of them, instead of just waiting for such creditors to catch up with you.

  • Have an attorney in your corner:

Fair or unfair, your mortgage lender will likely treat you better when it knows you are being advised and represented by an attorney (assuming that you would be filing your Chapter 7 case through an attorney). You will have the peace of mind that comes from knowing your rights, understanding what will happen when, and having an advocate available to get directly involved as needed.           

  • Get a fresh financial start instead of a continuation of a vicious cycle:

If you are surrendering your house and reducing your monthly cost of keeping a roof over your head, you may be tempted to think you don’t need a bankruptcy (in spite of the reasons cite above). Perhaps you don’t. But if you have fallen so far behind on you mortgage that it’s gotten to the point of foreclosure, the odds are that you need more help than giving up your house alone will achieve. You at least owe it to yourself to work through a sensible after-move budget, and then get legal advice about your realistic options.  Emotionally, there may well be wisdom in giving yourself a fresh start so that you (and your family) can better weather the challenges of the move.