When you need a rather quick solution, Chapter 7 can deal with your creditors and buy you time to sell your home, in the right circumstances.
Our last several blog posts have been about using bankruptcy to either prevent various kinds of liens hitting your home or deal with those liens if they happen. For example, in the last few weeks we’ve addressed, in reverse order:
- Protecting your home from homeowners’ association dues and assessment liens
- Addressing child and spousal support liens
- Preventing income tax liens through Chapter 7 and Chapter 13
- Dealing with already-recorded income tax liens
- Preventing judgment liens, and removing them if they’ve already attached to your home
So clearly bankruptcy gives you a multitude of tools to help you preserve your home and its equity.
It can do even more. In the midst of dealing with all your debts, bankruptcy can buy you time to sell your home. Let’s show you how, starting with Chapter 7 today, and Chapter 13 next week.
Chapter 7 Advantage—It’s Quick
Chapter 7 “straight bankruptcy” is quick.
Its quickness helps a number of ways. Chapter 7s are less complicated to prepare and almost always cost you less. So, practically speaking, you can usually go from your initial meeting with your bankruptcy lawyer to filing bankruptcy, faster.
This can be crucial in at least two sets of circumstances.
First, you’re up against some kind of debt-collection or possession-losing event that bankruptcy needs to stop. This can be related to your home, such as the start or the beginning of a mortgage foreclosure. Or it can be unrelated, such as a collection lawsuit against you, a paycheck garnishment, or vehicle repossession. You need to quickly file bankruptcy to stop a creditor from hurting you.
Second, you need to prevent some kind of lien from hitting your home. Preventing an income tax lien or judgment lien, for example, can, under some circumstances, mean the difference between not paying the underlying debt at all and paying it in part or in full.
Chapter 7 Advantage—It Focuses on the Present
The other big Chapter 7 advantage is that it focuses on your situation at the moment of filing. This is important as it applies to your assets and income.
Regarding your assets, Chapter 7 fixates—for most purposes—on your assets and their value at the moment of filing. It generally does not care about future assets (again, with rare exceptions).
This can be crucial when dealing a home that’s increasing in value. You may be getting close to having the maximum allowed equity for your applicable homestead exemption. Assume, for example, that your home is worth $250,000, you owe $230,000, and your state has a $25,000 homestead exemption. So you’d currently have $20,000 in equity ($250,000 minus $230,000). That equity amount can go up quickly if your property’s value is increasing, plus you’re paying down your mortgage (and maybe other liens against the home). Next year you may have too much equity to file a Chapter 7 case. Filing now lets you protect your equity now, and then it can grow freely after you’ve gotten your fresh start.
Regarding your income, Chapter 7 fixates—again for most purposes—on your income at the time of your filing. Future income, including increases in income, is generally outside of the reach of your creditors and the Chapter 7 trustee.
Buying Time to Sell Your Home
With all this in mind, how does Chapter 7 buy you time in selling your home?
Consider two scenarios. One, you’re current on your mortgage, and second, you’re far behind.
Buying Time When Current on Your Mortgage
First, assume you are current or close to current on your home’s mortgage. The amount of your equity is less than your homestead exemption amount. You are being battered by creditors, and if you don’t act quickly bad stuff will happen. So you’re tempted to sell your home to reduce your cost of living or to get at its equity. But you either don’t want to sell, or for personal or family reasons you’d rather wait to do so.
A Chapter 7 filing would prevent or stop virtually all lawsuits and garnishments. It could prevent judgment liens and income tax liens and support liens against your home. Judgment liens that are already on your home likely could be removed. Previously recorded income and support liens could be better resolved with your greater cash flow. You’d likely be better able to afford your mortgage and other home-related costs. All that would happen either immediately or within about 4 months after your bankruptcy lawyer filed your Chapter 7 case.
Buying Time When Behind on Your Mortgage
Second, assume instead that you are not current on your mortgage but rather you’re far behind and facing foreclosure. You definitely want to sell your home but you’ve run out of time. You’re about to lose your home to foreclosure.
Chapter 7 buys you some time. Instead of losing your home—and any equity you may have in it—to foreclosure, you stop the foreclosure. You gain a few precious months to either close a pending sale or to make a sale.
Or if you are not that close to foreclosure, filing bankruptcy may improve your monthly cash flow enough so that you and your lawyer can negotiate a “forbearance agreement” with your mortgage lender. This is a payment plan for catching up on the mortgage arrearage (and maybe any late property taxes). Then, anytime either during that payment plan or afterwards, you could sell your home.
You may even be able to work that into the forbearance agreement. You could agree to relatively smaller monthly catch-up payments, and then pay off of the remaining arrearage and the entire mortgage balance from proceeds of the house sale.