These 10 tools, especially used in combination, can defeat your mortgage debt and other home-based challenges.
A few blog posts ago we said that while Chapter 7 “straight bankruptcy” strengthens your hand with your secured debts, Chapter 13 can be much stronger. One way that Chapter 13 is stronger is in enabling you to keep things you own which have a secured creditor’s lien on them. Indeed, that’s probably the most common reason for filing a Chapter 13 case—to keep your home, vehicle, and/or other possessions at risk of repossession.
Because Chapter 13 can help you in so many ways keep assets with liens on them, we’ll focus today on just one of those assets, your home. Here are 10 ways that this tool helps you stay in your home.
1. More Time to Catch up on Unpaid Mortgage Payments
Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up. Chapter 13 often gives you years, which greatly reduces how much you have to pay each month to eventually get current. If you are many thousands of dollars behind on your mortgage(s) having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.
2. Stripping Second or Third Mortgage
Under Chapter 7 you simply have to pay any second (and third) mortgages on your home or lose the home. Chapter 13 gives you the possibility of “stripping” a second or third mortgage lien off your home title, potentially saving you hundreds of dollars monthly, and thousands or even tens of thousands of dollars in the long run. To do so the home value must be no more than the total of the liens legally superior to, or ahead on the title to, the junior mortgage you want to “strip.” In other words, there can be no home equity being encumbered by the mortgage at issue because that equity is fully absorbed by the other earlier liens. “Stripping” a mortgage can save you many hundreds of dollars every month and many thousands of dollars during the life of your home ownership.
3. Much Greater Flexibility in Selling Home
Chapter 7 gives you at most only about three or four months while your mortgage holder can’t foreclose and your other creditors can’t take action against you or your home. In contrast, under Chapter 13 you could potentially be protected for years. You may need to move and sell your home, but not until you are ready to do so. You may need to wait until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, so that you can live in your home in the meantime.
4. Get Current on Past Due Property Taxes
Filing a Chapter 7 case doesn’t protect you from property tax foreclosure—beyond the three, four months that the case lasts. Chapter 13 protects you and your home while you gradually catch up on those taxes, in a court-approved plan that also incorporates your mortgage(s) and all other debts.
5. Protection from Both Previously Recorded and Future Income Tax Liens
Chapter 7 usually does nothing to address tax liens that have already been recorded on the home, or to stop future tax liens on income taxes that you continue to owe after the bankruptcy case is completed. In contrast Chapter 13 provides an efficient and effective procedure for valuing, paying off, and getting the release of tax liens. And the IRS/state cannot record a tax lien on income taxes while the Chapter 13 case is active.
6. The Chapter 13 “Super-Discharge”
You can “discharge” (permanently write off) in a Chapter 13 case obligations arising out of a divorce decree dealing with the division of property and the division of debt (but NOT the provisions about child/spousal support). You cannot discharge these non-support divorce debts under Chapter 7.
So if you owe a significant amount of this kind of debt, and there isn’t already a lien on your home securing it, Chapter 13 could stop a lien from being imposed. The debt would be discharged at the end of your Chapter 13 case as a “general unsecured” debt.
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. Examples include 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, and local government liens for unpaid fees against your property.
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. 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.
10. Protect Equity in Your Home NOT Covered by the Homestead Exemption
If you have too much equity in your home—value 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 and protect the home by paying those creditors gradually over the course of the up-to-five-year Chapter 13 case.