Chapter 7 usually lets you retain your home if you are current (or not too far behind) on your mortgage payments (& other home-based debts).
Whether you can keep your home when filing a Chapter 7 “straight bankruptcy” mostly depends on two questions: 1) Are you current or close to current on your mortgage and other debts against your home, and 2) Is the equity in your home protected by the applicable homestead exemption?
Today we focus on your mortgage. Upcoming blog posts will hit other possible kinds of liens against your home, and then the homestead exemption.
Chapter 7 in General
When it comes to your home, Chapter 7 is designed for more straightforward situations with your mortgage and other home-related debts.
Under Chapter 7 if you want to you can generally keep possession of the collateral that is securing any of your debts. You just need to be current or at least close to current on that secured debt.
Whether the secured debt is a vehicle loan, furniture purchase contract, or home mortgage, if current or almost current you would usually be able to keep the vehicle, the furniture, or the home.
(Under most Chapter 7 cases you can usually also get out of owing anything on such secured debts by surrendering the collateral to the creditor. But today we’re focusing on keeping collateral, specifically your home.)
If Current on Your Mortgage
Do you want to stay in your home, are current on your mortgage payments, and will be able to keep up those payments after writing off all or most of your other debts? Then your home and your mortgage will very likely proceed through a Chapter 7 case smoothly without any change.
Compliance with Other Mortgage Requirements
You also need to be in compliance with other conditions of your mortgage contract. Two of the most common problematic ones involve keeping current on homeowner’s insurance and property taxes.
In most mortgage contracts, falling behind on either of these is considered a breach of the contract. So not being current on insurance or property tax constitutes separate legal grounds for foreclosure even if you’re current on the mortgage payments themselves.
This makes sense. If there’s no insurance in effect, your home could be destroyed in a fire and your mortgage lender would have virtually no collateral protecting their debt. If the property tax entity forecloses on the home, the mortgage lender would be foreclosed out along with you.
Often your monthly mortgage payment includes an “escrow” amount covering the homeowner’s insurance premium and property taxes. If so, then as long as you’re current on your mortgage you’re also current on these other obligations. But sometimes the “escrow” payment only covers one of these, requiring you to pay the other on your own.
If Not Current on Your Mortgage But Not Too Far Behind
Even if you ARE a few months behind on your mortgage payments, you may still be able to file a Chapter 7 case. It depends.
A Chapter 13 “adjustment of debts” may be the better option if you are behind on your mortgage payments. It can also be better if you are behind on insurance or property taxes, have a second mortgage, or have other liens on your home, such as from income taxes or child/spousal support.
But a Chapter 13 case takes SO much longer than a Chapter 7 one—usually 3 to 5 years instead of about 4 months. It has other potential disadvantages as well. So you have some incentive to try to file a Chapter 7 case if you can.
In a Chapter 7 case your mortgage lender will almost for sure require you to catch up on any missed payments. Usually you will have to make your regular monthly payments PLUS enough extra each month to pay off the arrearage within a certain length of time. Usually you will be given no more than a year or so to catch up.
So, you and your attorney need to look closely at your after-bankruptcy budget to figure out how much you could afford to pay extra each month towards catching up. Hopefully since you’re no longer paying the debts being writing off in your Chapter 7 case you’ll be able to pay enough.
How Much Time to Catch Up?
How many months you’d have to bring your account current would naturally determine how much you have to pay in catch-up payments each month. And how much time your particular lender will allow depends on its policies and on your particular circumstances.
Your attorney, who deals with mortgage lenders about such matters every day, likely has experience with your lender and will counsel you about this.
Also, you may qualify for a loan modification—a re-writing of the mortgage terms. The balance is never reduced, but the missed payments could perhaps be wrapped into the new modified mortgage. Then you would no longer have to catch up on the missed payments, but just pay the new mortgage payments going forward. Again, ask your lawyer about the modification option.
If You Can’t Afford to Catch Up Fast Enough
The reason that Chapter 13 can be a better way to save your home is that it gives you much more time to catch up on late mortgage payments. It can usually buy you as much as 5 years.
Plus as mentioned above Chapter 13 can help with other home- related debts, such as second (or third) mortgages, property taxes, and income tax liens.
Our very next blog post will address how Chapter 13 buys you more time if you need it.