When does filing bankruptcy save your home? When is “straight bankruptcy”—Chapter 7—the right tool, and when do you need Chapter 13?
If your most important goal is to preserve your home, here’s how each kind of bankruptcy helps (or doesn’t help) in different circumstances.
1. If you’re current on your home mortgage(s) but struggling to keep that up, and are behind on some or many of your other debts:
Chapter 7: Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Would also stop those other debts from turning into judgments, which would likely be liens against your home. May also enable you to avoid falling behind on other obligations—income taxes, support payment, utility bills—which could also otherwise turn into liens against your home.
Chapter 13: Does the same as above, plus is often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to get rid of a second or third mortgage. Is better at protecting assets, if you either have more equity in your home than your homestead exemption allows or have any other “non-exempt” asset(s).
2. If you’re not current on home mortgage(s) but are only very few payments behind, with no foreclosure started:
Chapter 7: May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies will agree to give you several months—sometimes up to a year—to catch up on your mortgage arrears. That’s a “forbearance agreement”—they agree to “forbear” from foreclosing as long as you make the agreed payments. Tends to work only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if the Chapter 7 filing will allow you to stop paying enough to other creditors so you will be able to pay off the mortgage arrearage quickly.
Chapter 13: Even if you’re only a few thousand dollars behind, you may well not have enough extra money each month to catch up quickly on that mortgage arrearage. Lenders seldom voluntarily give you more than 10-12 months to catch up, but a Chapter 13 forces them to give you a much longer period to do so—three to five years. That greatly reduces how much you need to pay towards the arrears every month, often turning the impossible into the achievable.
3. If you’re many payments behind on your mortgage(s), regardless whether a foreclosure has started:
Chapter 7: Not helpful here unless you have some extraordinary means for paying off the large mortgage arrears. Buys only a few weeks of time, at most three months or so (if the mortgage lender chooses to do nothing while your bankruptcy case is pending). Also, cannot get rid of a second or third mortgage.
Chapter 13: Again, gives you the option of up to five years to slowly but surely pay off the mortgage arrearage, during all of which time your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan payments. Assumes that you can at least make the regular mortgage payment consistently, along with the arrearage catch-up payment. Does not, under current law, enable you to reduce the first mortgage payment amount, although again might be able to get you out of your second or third mortgage
If any of this looks like it could provide the help that your home needs, please give me a call. Remember: these are just the broad rules. There are lots of other twists and turns which will likely apply to you. To understand the advantages and disadvantages of each option, and to get practical advice about what direction to go, you should see an attorney. Let me show you how the law can help meet your needs.