Chapter 13 enables you to use the pandemic’s mortgage payment forbearance process and sell your home if and when you’re ready to do so.
Last week we showed how Chapter 7 helps you take advantage of the pandemic foreclosure moratorium when selling your home. Today we show how it works even better with the more powerful Chapter 13 “adjustment of debts.”
In the last few weeks there has been an important related development. The Biden Administration extended the foreclosure moratorium deadline by 3 months, from March 31 to June 30, 2021. This also extended the mortgage payment forbearance request window until June 30, and potentially lengthened certain ongoing forbearances. White House Fact Sheet, February 16, 2021.
One more preliminary note. As of this writing (March 7, 2021), the U.S. House of Representatives will likely vote on the Senate’s version of Biden Administration’s American Rescue Plan legislation on Tuesday, March 9. Current indications are that it will pass, and President Biden will sign it this week. It appears to include a further extension of the foreclosure moratorium through September 30, 2021. President Biden Announces American Rescue Plan, January 20, 2021. This huge piece of legislation will very likely be the subject of our blog posts in upcoming weeks.
But for now, here’s how Chapter 13 can greatly help you sell your home, on your own timeline, whether or not you qualify for a mortgage forbearance agreement.
Chapter 7 vs. Chapter 13 in Selling Your Home
Last week we emphasized that filing a Chapter 7 “straight bankruptcy” provides two main advantages when selling your home. It 1) gives you financial stability and 2) buys you time to sell your home. In many situations Chapter 13 does both of these and does so much better.
1) Chapter 13 Brings Financial Stability
Chapter 7 bankruptcy brings you stability primarily by writing off (“discharging”) most or all other debts. That way you can focus on your house. You can focus your financial resources on the mortgage payments, now or when your forbearance agreement expires. And you can focus your emotional energy on getting the house ready for sale and on going through the selling process.
But in many situations discharging the debts that Chapter 7 discharges does not help enough. Chapter 13 gives you financial stability in important ways that Chapter 7 does not.
Chapter 13 protects you from debts that Chapter 7 does not discharge. You’re not left at the mercy of aggressive creditors like an ex-spouse and the tax authorities. You pay debts like theirs under a court-approved payment plan based on what you can reasonably afford to pay. In the meantime these creditors are forbidden to try to collect on their debts. You just need to pay into the plan as you and your bankruptcy lawyer proposed and the bankruptcy court confirmed. Then you really can focus your financial resources and your attention on selling your home.
Chapter 13 also gives you much more leverage over various other kinds of creditors, and particularly over your mortgage lender. This is mostly in the form of buying you much more time to sell your home.
2) Chapter 13 Buys You Time
A Chapter 7 case buys you some time not much. It immediately prevents a home foreclosure procedure from starting, or from finishing. But that protection usually lasts only a few weeks, seldom more than a couple months. That may be what you need when you just need a little bit of time to finish closing a house sale. Or to stop a judgment or tax lien from hitting your home’s title. But a Chapter 7 case buys you only this limited time.
Chapter 13 can buy you more time. Sometimes it gives you much, much more time. It can do so in various ways. These ways can all tie into the foreclosure moratorium and a resulting forbearance agreement that you may have with your mortgage holder.
Ways Chapter 13 Buys Time
First, assume you’ve decided to sell your home but need time to get it ready. Chapter 13 can usually give you months to do this. Let’s say you are getting to the end of a forbearance agreement. You know you won’t be able to pay the regular mortgage payments at that point. Or you won’t be able to pay that plus the catch-up amount. Chapter 13 will often buy you many months, even longer under the right facts. So you would get the highest sale price instead of getting low-balled for being a desperate seller.
Second, now assume you wish you didn’t need to sell your home for a year or two or three. You have kids in school and so don’t want to force them to transfer. Or you’re taking care of an elderly parent who needs the current stability for a while longer. Or you’ll be able to downsize in a couple years for whatever reason but it would be very disruptive now. Chapter 13 will often buy you a couple years, maybe even up to 5 years, to sell when the time is right for you.
Third, you may currently not know whether you’ll be able to afford to hang onto your home or will need to sell it. You don’t know because you’ve been on a crazy rollercoaster ride of extensions to the pandemic foreclosure moratorium. And like tens of millions of other Americans your income has taken a big hit. You don’t know where you’ll land in 6 months or a year or two. Chapter 13 can give you and your home protection now and the flexibility to adjust in the next couple years.
Chapter 13 could make it possible for you to sell your home until the time is right for you. Do you fear you cannot afford to catch up on the arrearage accrued during your forbearance period? A Chapter 13 payment plan could put off paying that arrearage until you sell your home. That could maybe even be years from now. Do you wish you didn’t have to sell, or aren’t sure whether you will, depending on your job situation? Or depending on health or other personal circumstances? A Chapter 13 case can buy time until those circumstances develop.
You may even not have to sell. Chapter 13 may enable you to stretch the catch-up payments out longer than your mortgage holder would allow so that you could afford to stay.