Beyond the pandemic’s foreclosure moratorium, Chapter 7 bankruptcy gives you serious advantages if you’re selling your home.
In the last two blog posts we presented 10 ways bankruptcy significantly helps you take advantage of the foreclosure moratorium. One of those ways—from two weeks ago—was in the context of selling your home. We drill down into this now, to show how it works in practical terms. We start today with Chapter 7 “straight bankruptcy.” Next week we’ll show how it works with the even more powerful Chapter 13 “adjustment of debts.”
The House-Selling Example
You’ve decided to sell your home. Let’s say you’ve taken advantage of the pandemic’s foreclosure moratorium. So you’ve gotten a forbearance agreement from your mortgage lender. This means that you’ve been able to legally avoid paying the mortgage for many months. But at some point you’re going to have to catch up on the many thousands of dollars of missed payments. You either have an agreement about the terms for catching up, or the terms for doing so are up in the air. But either way you know you just won’t be able to afford the significant extra monthly obligation. You’ve decided your only solution is to sell your home. Property values have gone up and there are buyers with money, so it makes sense to take advantage of this now.
Or maybe you haven’t gotten a forbearance agreement for whatever reason. Maybe your mortgage is not a federally-connected one so it doesn’t qualify for the pandemic’s mortgage moratorium. Or your mortgage may qualify but still somehow you haven’t gotten your lender to let you stop making mortgage payments. So you haven’t been able to keep up on those payments and your lender is threatening foreclosure. You’ve decided to sell to get what you can from the house and move on with your life.
How does bankruptcy—today specifically, how does Chapter 7—help in these situations?
Your Home without Bankruptcy Protection
Most likely you have other financial challenges beyond the home mortgage itself. But let’s focus first on the mortgage itself. The pandemic moratorium did not do anything to address the accruing missed mortgage payments. You are effectively at the mercy of your mortgage lender or servicer about how you’ll need to catch up. There is nothing currently that prevents the lender from foreclosing on your home as soon as the moratorium is over. The lender could demand that you pay all the accrued missed payments in full, and foreclose if you don’t pay.
So what’s the practical effect if you are in the process of selling the home? A pending foreclosure signals to potential buyers that you’re a desperate seller. In most circumstances that will bring down the dollar amount of the offers you get. It will likely completely scare away some buyers—especially if there are also creditor-related liens against your home. Instead you’ll have buyers trying to take advantage. In less desirable areas, you may have trouble getting any reasonable offers.
Most importantly, you may run out of time. Once the foreclosure is completed, your house is gone. You no longer have anything to sell. If that happens before you close your home sale, you can’t close the sale. (This is one of the reasons buyers are scared off by a house in a foreclosure. Why put in an offer if there will be no house to buy in the end?)
Beyond the mortgage itself, you may well have other debts that are causing you major headaches. Some debts may have already latched onto your home’s title, or are in the process of doing so. These eat into your equity. (See last week’s blog post about strategies for dealing with judgment and income tax liens.)
Chapter 7 Brings Financial Stability
Assume that you’re OK with your mortgage holder, at least for now. You’ve decided to sell your home. Maybe that’s in part because you won’t be able to afford paying for it once the moratorium is over. But you’re behind on other debts. You are being harassed by debt collectors. You’ve either already been sued or expect to be any time. You know that those debts can turn into liens against your house. Those debts would then have to be paid in full, instead of going to you. Plus those debts can result in garnishment of your bank accounts and your paychecks.
If you see a bankruptcy lawyer and file a Chapter 7 case, most likely you can legally get rid of most of your debts that are not attached to your house. That would give you some peace of mind so that you can focus your attention on selling your home. It takes time and energy to prepare a house for sale to get the best value. It takes more to hire a realtor and to work closely with him or her to do everything it takes. It’s extremely hard doing all that while dodging creditor calls and threats.
Filing a Chapter 7 case also stops pending and future creditor lawsuits from hitting your home’s title. So YOU will get your hard-won equity from your sale proceeds instead of that money going to your creditor.
You might even be able to “avoid”—legally undo—an existing judgment lien, with the same result. YOU get that money when the house sells instead it going to that creditor. (See our last blog post about the judgment lien avoidance procedure.)
Chapter 7 Buys You Time
Besides immediate peace of time, filing a Chapter 7 case buys you time in various ways.
It takes pressure off to sell right away to deal with creditors unrelated to your home. If you have a large debt or debts you’re behind on, Chapter 7 immediately stops those creditors’ collection actions. Then you can prepare your house and sell it without that pressure. And, as we said above, you protect your equity from judgment liens (and maybe other forced liens).
Assume instead that you’re close to a home sale but have a foreclosure either imminent or already started. A Chapter 7 filing prevents or stops the foreclosure and keeps it on hold for at least a few weeks. It may even buy a few extra months. That may be all the time you need to get your house sold.
But what if you’re nowhere close to selling your home? Instead you want to sell your home before the foreclosure moratorium and your forbearance agreement with your lender expires. With all the extensions of the moratorium, who knows when that will be? You want to be prepared to file a Chapter 7 case before you would lose the house to any subsequent foreclosure. It may be wise to focus your energy now on selling your home. Then be ready to file a Chapter 7 case at a time strategically determined. That way you protect your house equity if it doesn’t sell fast enough.
Of course, life is complicated and your situation likely includes pieces of more than one of the above scenarios. That’s when you especially need the advice and counsel of an experienced bankruptcy lawyer. There’s usually a lot to sort through to decide on the course of action that’s best for you and your home.
Chapter 7 gives you peace of mind from your aggressive creditors. It protects your upcoming home sale proceeds so that money goes to you instead of to your creditors. And it buys you time so that you can maximize the money you get out of your house sale.
Chapter 13 accomplishes these same goals, but with quite a different process. It usually takes longer but can be more powerful and flexible. We’ll get into that next week.