Chapter 13 is extraordinary in the number of distinct ways it can solve debt problems endangering your home. Here are five more ways beyond the five of the last blog.
6. Chapter 13 “super-discharge”: You can discharge (legally write off) some debts in a Chapter 13 case that you cannot in a Chapter 7 one. A couple of decades ago there were many more kinds of debts that could be discharged under Chapter 13, but Congress has whittled away at the list steadily. Now there are two left worth mentioning here. First, obligations arising out of divorce decrees dealing with the division of property and of debt (but NOT the part dealing with child/spousal support); and second, obligations involving “willful and malicious injury” to a person or property (but NOT related to driving while intoxicated). Both of these “super-discharged” types of debts are legally complicated, and definitely need to be addressed with the help of an experienced attorney. But in the right circumstances Chapter 13 can discharge one of your most serious debts, the same one that Chapter 7 would leave you owing.
7. Nondischargeable debts such as income taxes, back child/spousal support: Special debts which cannot be discharged in bankruptcy leave you at the mercy of those creditors just a few months after you file a Chapter 7 case. Those creditors—such as the IRS, and your ex-spouse and/or the state or local support enforcement authorities—often have the power to impose tax and support liens on your home, and potentially can even seize and sell your home to pay those liens. In contrast, a Chapter 13 protects you while you pay off those special debts in an organized plan, by preventing those liens from being placed on your home. By the time your Chapter 13 case is finished, those special debts are paid in full, never to threaten your home again.
8. “Statutory liens”: utility, ”mechanic’s”/”materialman’s,” and child support liens: If before filing bankruptcy you already have one of these involuntary liens imposed by law against your home, those liens would very likely survive a Chapter 7 bankruptcy. Because the “automatic stay” that prevents the enforcement of liens expires with the completion of a Chapter 7 case, these creditors would be able to threaten your home at that point. Instead, in a Chapter 13 the “automatic stay” continues throughout the three-to-five year case, again protecting your home while you satisfy the lien.
9. Judgment liens: Unlike the other nine items in this list, judgment liens can be avoided, or removed from your home’s title, in the same circumstances under Chapter 7 as in Chapter 13. A judgment lien can be removed if it “impairs” your homestead exemption, that is, if it encumbers the equity in your home that is protected by that exemption. The reason that I list it here is that this judgment lien avoidance can sometimes be put to extra good use in Chapter 13 when used in combination with one or more of these other 9, in a way which could not happen in Chapter 7. Let’s say for example that your home equity position would allow you to remove a judgment lien, but you are so far behind on your mortgage payments that you would lose your home to a foreclosure after finishing a Chapter 7 case. Your ability to remove that judgment lien from your home title would do you no good if you’re going to have your home foreclosed by your mortgage lender a few months later. It’s the Chapter 13’s ability to give you protected time to cure that mortgage arrears that gives practical value to your power to remove the judgment lien.
10. Preserve non-exempt equity: Home property values have declined so much in the last few years that most people thinking about bankruptcy do not have too much equity in their homes. That is, if there is any equity at all, it’s protected by the applicable homestead exemption, and therefore not at risk if you file a Chapter 7 case. But IF you DO have more value in your home than allowed under your homestead exemption, Chapter 13 can often protect it. You don’t run the risk of a Chapter 7 trustee seizing it to sell and pay the proceeds to your creditors. Instead, under Chapter 13 you can often either keep the home by paying those creditors gradually over the course of the up-to-5-year Chapter 13 case, or can sell the home yourself on your own schedule. Either way, Chapter 13 leaves you much more in control of the situation.
Each one of these ten Chapter 13 powers can solve a big problem so that you can keep your home. But they can have an especially dramatic impact when used in combination. In the next blog I’ll give some examples so that you see how these ten actually work, both separately and in combination.