What happens if you file a Chapter 13 case to save your home but then later decide NOT to keep it after all?
When making an important decision, it’s smart to consider what would happen if later things didn’t go the way you hoped or expected. So in thinking about filing a Chapter 13 case to save your home, it’s good to consider what would happen if a year or two later you needed to move out of the area, or if your income decreased so that you could not keep the house. Your decision about filing under Chapter 13 will be a much better one if you think through such possibilities.
Chapter 13 can be an incredibly great way to save your home if it is under threat of foreclosure. It can give you a lot of time to catch up on missed payments—up to 5 years. Same thing if you’ve fallen behind on property taxes. Also, your second mortgage may be able to be “stripped,” so that you don’t have to make its monthly payments, catch up on any of the missed payments, or pay most of the balance. Chapter 13 can also deal very favorably with income tax and judgment liens on your home. Finally, throughout the 3-to-5-year case, you and your home would be protected from foreclosure or any other collection actions by your creditors.
So Chapter 13 gives you many important advantages, but to make a good decision about it let’s look at two scenarios. First, what happens if your job or some other life event requires you to move to another part of the state or country so that you have to sell the house? And second, what happens if your income goes down so much that you can no longer afford the home even with the Chapter 13 advantages? The first we cover today, the second in our next blog post.
Flexibility under Chapter 13
After your Chapter 13 plan is formally approved by the bankruptcy judge by his or her signing of the Order Confirming Plan—usually around three months after your case is filed—the terms in your plan and in that Order govern what happens in your case. However, if your circumstances change there are a variety of ways of dealing with the changes.
If you know in advance that a year or two later you will want to sell your house and move—for example, once a child finishes high school or a local college and will be moving out—then that intended sale can be built into your Chapter 13 plan from the beginning.
But life is often not that predictable. You may have every intention of staying in your home but then an unexpected out of the area job opportunity could later arise that you just couldn’t pass up. Or you may end up needing to care for an elderly out-of-state parent who wants you and your family to live in his or her home. Would Chapter 13 give you enough flexibility to allow you to make that transition by selling your home and completing your case even though that’s not the way your plan was originally set up?
Selling Your Home During a Chapter 13 Case
The short answer is that you would generally be able to switch gears in the middle of a Chapter 13 case to sell your home. Exactly how that would work would depend on all the details of your case. So be sure to discuss this possibility as it applies to your case with your attorney.
But to give you a realistic view of how it can work, let’s go back to the example we keep re-visiting in this series, the married couple, Andrew and Amanda, who filed their Chapter 13 case to save their home from foreclosure and to deal with a substantial income tax debt. Their court-approved monthly plan payment is $525 per month, which they were originally scheduled to pay for four years. Most of what they were paying into their plan was going to catch up on their mortgage arrears and to pay income taxes that they could not have discharged (legally written off) in a straight Chapter 7 bankruptcy case.
The Unexpected Opportunity
So although they had not planned on moving from their house, two years after filing their Chapter 13 case Andrew’s widowed mother invites Amanda and Andrew to move in with her into her large home in a neighboring state. The home has an in-law apartment adjoining it that she would move into. She would require them to pay monthly the same amount as their current regular first mortgage payment–$1,500—on a rent-to-own deal that would allow them to buy the house from her on a contract with very favorable terms once they finished their Chapter 13 case. This is a great financial opportunity for Andrew and Amanda. So, could they sell their house and continue their Chapter 13 case to pay off the income taxes and also gain all the rest of the benefits of their case—such as the discharge—legal write-off—of most of their debts, including their 2nd mortgage?
To keep the facts straightforward, assume that:
- They find new jobs in that area paying the same as their present jobs.
- Their living expenses there would be about the same as now, including the new rent payment being the same as their present mortgage payment.
- As a result they would continue making the same $525 monthly plan payment after selling their house and moving.
- Amanda and Andrew can sell their house breaking even, including paying off whatever portion of the mortgage arrearage that they hadn’t paid during their two years of plan payments.
- Soon after their case was originally filed, their attorney had “stripped” their entire $45,000 second mortgage off their home’s title, even though that debt would not be legally discharged until just before the end of their Chapter 13 case.
- Of the first two years of their plan payments (24 months of $525 = $12,600), most of those funds went towards curing their first mortgage arrearage of $15,000, and none yet towards the $5,000 they owe in 2010 and 2011 income taxes.
Amending Their Chapter 13 Plan
After meeting with their attorney, Andrew and Amanda authorize him to ask the Chapter 13 trustee for permission to sell the property and to prepare an amended plan adding a provision referring to the intended sale. The trustee does not object to the sale since it does not change how much the creditors receive. For the same reason, no creditors object to the proposed amended plan, so it becomes the new court-approved plan.
The couple puts their home on the market and in due time sell it and move to the mother’s home. They keep on making their Chapter 13 plan payment of $525 per month until the $5,000 in income tax is paid off, as are any other obligations of the case (trustee and attorney fees, and any portion of the other creditors to be paid). The couple end up being in their case somewhat shorter than the originally anticipated 48 months because some of their mortgage arrearage is paid through the proceeds of their house sale. At the completion of their case their remaining debts are discharged, leaving them completely debt free.
At least in this comparatively straightforward example, Amanda and Andrew’s original decision to save their home and pay their income taxes through Chapter 13 end up being a very good one. That’s true even though their circumstances changed significantly and they ended up selling the home they had intended to stay in.
Most of the money that they had paid into their plan during the first two years went to pay the mortgage arrears. That enabled them to break even when they unexpectedly had to sell the home two years later—they would not likely have been able to sell otherwise, at least not without trying to pull off a much more difficult short sale, with its detrimental credit impact.
Making their regular mortgage payments during those two years kept a roof over their heads and would have cost them a similar amount each month if they had surrendered their home to foreclosure and rented instead. They avoided a foreclosure on their credit record and instead paid off the first mortgage in full.
As for the income taxes, being in the Chapter 13 case prevented interest and penalties from accruing on the 2010 and 2011 income taxes during the two years while their plan payments were going towards the mortgage arrearage and not towards the taxes, and then through to the end of the case. That saved them a fair amount of money.
Finally, finishing the Chapter 13 case resulted not having to pay most of their debts, other than the first mortgage and the two recent years of income taxes. They discharged virtually all of the $3,000 in older income taxes, the $45,000 “stripped” second mortgage, and their $60,000 in credit cards and other unsecured debts.
Yes, in their particular situation, Andrew and Amanda’s decision to file a Chapter 13 case to save their house was a very good one, even if their circumstances significantly changed mid-stream.