Do you really have to file a 3-to-5 year Chapter 13 case to stop a foreclosure of your home and then be able to keep it permanently?
Avoiding Chapter 13?
Chapter 13 “adjustment of debts” is often considered the “save your home” bankruptcy option because of all the advantages it can provide towards that goal. But what if most of those advantages do not apply to you? Is there ever a situation where you can save your home simply by filing a Chapter 7 “straight bankruptcy” instead?
After all, Chapter 13 certainly comes with disadvantages, starting with the fact that it takes several years to complete—instead of just the three, four months that a Chapter 7 usually takes. Probably the most important downside is that you have to successfully complete a Chapter 13 case to get a discharge (legal write-off) of any of your debts. Lots of things can change in three to five years. Although Chapter 13 is designed to handle a certain amount of change in your life, there are some limits in its flexibility. So in this respect it is inherently riskier than Chapter 7.
When Chapter 7 May Be Sufficient
As a general rule of thumb you do not need a Chapter 13 case if:
- after filing a Chapter 7 case you could afford to catch up on any mortgage arrearage within about a year
- you do not have a second mortgage, or if you do your house is worth at least the amount of the combined first and second mortgage balances
1. If you are behind on your payments and you file a Chapter 7 case, you will likely be given a certain amount of time to bring your payments current. How long depends on your mortgage lender and your specific circumstances. About a year to catch up is the limit for many. To find out how much time you would likely have, talk with your attorney, who may well have experience with your lender or can find out by contacting it directly.
Then a very careful assessment needs to be made of how much extra you can pay each month—once you file a Chapter 7 case and no longer need to pay the debts that you expect to discharge. This should give a decent estimate how long it would take you to get current, and whether you could realistically do so.
2. Under Chapter 13 (and NOT Chapter 7) you can “strip” the entire second mortgage off your home’s title if the house’s value is less than the balance of your first mortgage. In other words, this works if all of the home’s equity is encumbered by the first mortgage. This can save SO much money—tens of thousands of dollars, or even sometimes hundreds of thousands in the long run—that anybody with a second mortgage and the indicated equity posture just mentioned should seriously consider Chapter 13. (If the house is worth more than the amount of the balance of the first mortgage but less than the combined first and second mortgage balances, the only PART of the second mortgage can be stripped. Whether doing a Chapter 13 under this situation is worthwhile depends on the details of the case.)
Let’s illustrate saving a home under Chapter 7 with an example.
Sue and Frank are a married couple in their 50s. They were in an automobile accident two years ago which injured both of them and left Frank temporarily disabled and unable to work for 18 months. The other driver was at fault but had no insurance, and their own uninsured insurance benefits paid out its coverage limits leaving them personally liable for $70,000 in medical bills. They were also unable to pay their other bills. These included credit card balances totaling $40,000 resulting from “living on credit cards” while Frank was not working when they simply had no other way to keep bread on the table, pay their health insurance premiums, and make their one vehicle payment. They did just succeed in paying off their vehicle loan; they absolutely relied on this older vehicle to get to work and so felt they had no choice.
During Frank’s rehabilitation, they fell six payments behind on their relatively modest mortgage payments of $800 per month, a total of $4,800 in arrears. Their lender has begun to threaten a foreclosure, although no date has been set. They have no second mortgage.
Many of their medical bills have gone to collections, and a number of these have sued them, gotten judgments, resulting in liens on their home, and one just began garnishing Frank’s paychecks. Sue and Frank have also missed payments on most of their credit cards, have been hit with late fees and jacked-up interest rates, and some are threatening lawsuits as well.
The Chapter 7 Solution
Sue and Frank meet with an experienced bankruptcy attorney. After analyzing their situation, the attorney calculates that, if the paycheck garnishments were stopped and they did not have to pay the $110,000 in medical and credit card debts, with their present income Sue and Frank could comfortably make the regular mortgage payments. Indeed, as they look carefully at their budget unburdened by these other debts, and after accounting for the recent payoff of their vehicle loan, Sue and Frank express confidence that if they squeezed their budget temporarily they could realistically pay an extra $400 or $500 per month towards their mortgage arrearage. That would catch up their arrearage in about 10 to 12 months. Their attorney tells them that their mortgage lender characteristically accepts “forbearance agreements” from homeowners in their situation, giving them up to a year to catch up.
Sue and Frank file a Chapter 7 case, which immediately stops the garnishment, and results in the “avoiding” of the judgment liens on their home. Their attorney negotiates a forbearance agreement with their mortgage lender. The lender agrees to not begin a foreclosure as long as Sue and Frank make the next 12 months of regular payments on time, plus pay an extra $400 per month during those same 12 months. A little more than three months after their Chapter 7 is filed, the bankruptcy court grants them a discharge of all of their medical and credit card debts and closes the case. Another nine months later, Sue and Frank finish paying off their mortgage arrears. They are current on their mortgage and have no other debts.