Have the flexibility to sell your home when you want, giving time for it to add equity, while keeping creditors away from that equity.
If you are feeling overwhelmed by debts and wondering if you should file bankruptcy, and if in the midst of this you own a home, you might also be wondering whether you should be selling it. Let’s assume that you’d rather not sell right now, because it’s not the right time for personal or family reasons. Or maybe the home doesn’t have much equity now but its value is increasing and so you think it will likely have significantly more equity two, three years from now.
But the problem is that you have creditors threatening to sue you, get judgments and put liens on your home, eating up any equity that’s there now and any future equity as well. How can bankruptcy help here?
The Chapter 7 Solution
Our last blog post was about the advantages under Chapter 7 “straight bankruptcy” if you currently have some equity in your home but no more than is protected by the homestead exemption. Assuming you were current or close to current on the home’s mortgage(s), you could keep your home and its equity would be protected from your creditors. Pending lawsuits would be stopped and future ones would be prevented, avoiding judgment liens against your home. Judgment liens that were already on your home would likely be removed. All that would happen within about 3 or 4 months after your Chapter 7 case was filed. Then you could sell your home immediately afterwards, or later if you wanted to wait for a better time or after the home’s value increased.
When Chapter 7 Doesn’t Help Enough
But what if you are way behind on your home’s mortgage(s), on its property taxes, or homeowners’ association fees? Or what if you have debts that would not be discharged (written off) in a Chapter 7 case, such as recent income taxes, back child or spousal support, or student loans?
In these situations Chapter 7 doesn’t help enough. Having a little equity in your home doesn’t help if you are behind on the mortgage, property taxes, or homeowners’ association fees, all of which could result in your home being foreclosed out from under you. And debts that aren’t discharged could become liens against your home after the Chapter 7 case is over, sometimes giving their creditors the ability to foreclose, and at least their liens eat up your equity.
The Chapter 13 Solution
These two sets of problems are both solved by instead filing a Chapter 13 “adjustment of debts,” allowing you to protect your home’s present and anticipated equity.
First, if you are behind on a mortgage, property tax, or homeowners’ association obligation, filing a Chapter 13 case will prevent the creditor from taking action against you and your home while giving your 3 to 5 years to catch up on that mortgage, tax, and/or obligation. Under certain circumstances you’d get significant advantages, such as being able to “strip” your second (or third) mortgage so that you would no longer need to make the monthly payment and could write off most of the balance, setting your home up for future building of equity. Or you could “avoid” judgment liens—remove them from your home’s title—freeing up equity that they were tying up.
Second, if you owe debts that can’t be discharged in a Chapter 7 case, such as income taxes or support arrearage, in most situations those types of creditors would be stopped from taking any collection action against you while you paid the obligation, again over 3 to 5 years, through payments that fit your budget. You would get various breaks with many of these kinds of debts. For example, with income taxes, usually no future interest and penalties would accrue once you filed your Chapter 13 case, reducing the total you’d need to pay. Income tax liens on your home would be resolved in beneficial ways, minimizing what you’d need to pay on them before they were released from your home’s title.
Selling When You Want
Chapter 13 often gives you tremendous flexibility about the timing of the sale of your home.
When you file a Chapter 13 case or very shortly thereafter, you and your attorney put together a formal payment plan, laying out your intentions with all your creditors. That plan goes through a bankruptcy court approval process, with limited opportunities for creditors to object. If you are intending to sell your home during the 3-to-5-year length of the Chapter 13 plan, you could state in your plan when you intend to do so, what creditors you would pay when that happens, and then what the rest of your payment plan would look like afterwards up to the completion of your case.
This allows you to, in the right circumstances, to hold off paying some creditors until when you sell your home. Holding off selling the home could well give you more equity to work with when you do sell. You could also have more equity then because of removing certain liens on the home as mentioned above.
Or if you are just considering selling your home down the line and are not yet sure about it, you would not necessarily say anything about that in your Chapter 13 plan. Instead you would put together a payment plan assuming that you’d keep your home, giving you time for your personal/family/employment situations to play out, as well as to see whether your home value increases.
Then you could decide a couple years into your Chapter 13 case to amend your payment plan and sell your home, if that is in your best interest. You may be able to complete your case with the sale or else finish off the case after you sell.
Or instead you could wait until the completion of your case and sell at any point afterwards.
Or finally at any point during your Chapter 13 case you could convert it into a Chapter 7 case and sell your home a few months later as soon as that was finished.
We’ll talk about these delayed selling options in our next blog post in a couple days. But you can see how Chapter 13 can be a tremendously flexible way to keep your creditors at bay while you address your obligations in a manageable way, and while keeping open your options for selling your home.