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Archive for the ‘Home Mortgage’ Category

Your Home Mortgage in Chapter 7 and Chapter 13

November 27th, 2017 at 8:00 am

Here are 6 ways filing a Chapter 7 case can help you deal with your home lender and related debts, and 6 ways filing a Chapter 13 one can.

 

 If you’re buying a home your mortgage and other home-related debts are probably your most important ones. That’s especially true if you want to keep the home. So the choice between filing a Chapter 7 “straight bankruptcy” and a Chapter 13 “adjustment of debts” often turns on how each would handle these kinds of debts. We’ll get into more detail about these in upcoming blog posts, but here’s an introductory list.

Chapter 7

  1. Maintain current mortgage payments: If you want to keep your home and are current on your mortgage, just continue making the payments. Doing so should become much easier since you’re likely discharging (legally writing off) all or most other debts.
  2. Forbearance agreement: If you are no more than a few months behind on your mortgage, enter into a “forbearance agreement” with your mortgage lender. You agree to pay an extra amount each month to catch up on the mortgage. This assumes that your bankruptcy filing frees up enough money each month so that you can catch up fast enough
  3. Judgment lien avoidance: Chapter 7 can often “avoid” (remove from your home title) a creditor’s judgment lien against your home.
  4. Stop ongoing foreclosure to buy time to sell: If you are in the midst of selling your home, filing bankruptcy may buy enough time to close the sale. A Chapter 7 case buys you only a limited amount of time. Plus the Chapter 7 trustee may also have a say in what happens. So be sure to discuss this carefully with your bankruptcy lawyer.
  5. Buy time to save money and move: If you’re surrendering your home, Chapter 7 can stop a foreclosure and buy you more time.  You can be in your home without paying your mortgage longer, giving you more time to save money for your upcoming rent payments and moving costs.
  6. Discharge any “deficiency balance”: Surrendering your home without bankruptcy could result in a large “deficiency balance” owed from your mortgage debt. That’s the difference between the amount the home would sell for and the amount of the loan balances. Any such “deficiency balance” would be discharged in your Chapter 7 case.

Chapter 13

  1. Maintain current mortgage payments: As with Chapter 7, it’s usually much easier to keep current than before filing. That’s because Chapter 13 usually greatly reduces how much you pay on other debts.
  2. Much more time to catch up: Chapter 13 gives you as much as 5 years to catch up on a past-due mortgage and/or property taxes.  You enter into a court-approved payment plan based on your ability to pay. You are protected from your mortgage lender and all your creditors.
  3. “Strip” a second and/or third mortgage: If the value of your home is less than the balance on your first mortgage, you may be able to remove junior mortgages from your home’s title. You could stop paying these monthly payments. This would make keeping your “underwater” home more economically sensible.
  4. “Avoid” creditors’ judgment liens: This is the same as in Chapter 7 listed above.
  5. Dealing with other liens on your home: Chapter 13 usually provides more flexible and practical ways to deal with most other kinds of liens. These include liens for income taxes, child/spousal support, and home repairs/remodeling.
  6. Flexible timing for selling your home: You can often arrange to sell your home 2-3 years after filing. This is handy if you want to stay in your present home until a child graduates, you make a career move, or until your home’s property value increases.

 

Buy Much More Time for Your Home with Chapter 13

October 18th, 2017 at 7:00 am

Filing a Chapter 13 case buys you time and flexibility for catching up on your mortgage arrearage. Lots more of both than in Chapter 7. 

 

Two blog posts ago we said Chapter 7 buys some time with your home mortgage while Chapter 13 buys much more time. We then showed how Chapter 7 can help. Today we get into how Chapter 13 can be much better.  

The Limits of Help from Chapter 7 “Straight Bankruptcy”

Chapter 7 is quick, but is limited in what it can do for your past-due mortgage. Mostly it can help get rid of other debts so that you can financially focus on your mortgage.

Chapter 7 helps with your mortgage only indirectly. If you’re behind on payments you’ll have to make arrangements with your mortgage lender to catch up.  The bankruptcy case gives you no mechanism or protection in that catching up process. You’re essentially on your own, and at the mercy of whatever timetable your lender imposes on you for catching up.

That has some practical consequences if you’re behind on your mortgage and want to keep your home.  If you file a Chapter 7 case, you need to be confident that you can catch up on your mortgage fast enough to satisfy your mortgage lender. That means that you must:

·         have access to a pool of money to catch up on your mortgage within a couple months after filing bankruptcy;
·         make prior arrangements with the lender for adequate monthly catch-up payments; or
·         know the lender’s policies about catch –up payments, especially how much time the lender allows to get current.

Assuming that you don’t have that pool of money to catch up in a lump sum, your bankruptcy lawyer may be familiar with your particular mortgage lender’s policies and practices about doing so through monthly payments. Those policies and practices can vary widely among lenders. Plus, your individual circumstances can greatly affect how flexible your lender is willing to be with you.

When You Need Chapter 13 “Adjustment of Debts”

Focusing only on your mortgage itself, you need a Chapter 13 case when Chapter 7 isn’t good enough. You want to save your home but won’t have enough money or time to catch up as your lender demands.

There are lots of reasons to file under Chapter 13 that have nothing to do with your home.  For example, it can be the best way to deal with income taxes, child support, or a vehicle loan. There are also many possible reasons that involve your home but not your first mortgage. For example, Chapter 13 can deal well with an income tax lien, unpaid property taxes on your home, or a second mortgage.
But today let’s focus on buying time with the mortgage itself.

Stretching Out Mortgage Catch-up Payments

In a Chapter 13 case you get as long as 5 years to catch up on a mortgage. Based on your income your payment plan will be required to be either 3 years or 5 years long. But even if you qualify for a 3-year plan you can usually stretch it out up to 5 years. Your budget just needs to justify that you need more time.

Stretching the amount you’re behind over such a long period make the monthly catch-up payments more reasonable. If you are quite far behind, it can make keeping your home manageable when otherwise it wouldn’t be.

Flexibility in Catching Up

Another crucial benefit of Chapter 13 is the power it gives you over your mortgage related to other important debts. A few paragraphs ago we mentioned other debts like income taxes, child support, and vehicle loans. After you finished a Chapter 7 case your mortgage lender would not care at all about other debts you may continue to owe. In contrast, Chapter 13 allows you to address those other debts at the same time as your mortgage.

How this works depends on the specifics of your case. The laws about Chapter 13 determine how different creditors can be treated. A huge factor is the legal category of each debt—secured, “priority,” and “general unsecured.” Also important are specific facts, such as how well secured your mortgage is by your home’s equity. Generally the more equity there is to protect your lender the more flexibility you’ll have.

Conclusion

We’ll get into these kinds of specifics in upcoming blog posts.  For now what’s important is that a Chapter 13 case filed through your bankruptcy lawyer powerfully buys time and enables you to meet other essential debt obligations, all the while protecting you from your mortgage lender and from all your other creditors.

 

Catching up on Property Taxes When You Have a Mortgage

August 11th, 2017 at 7:00 am

If behind on property taxes on property with a mortgage, that likely puts you in default on the mortgage itself. Chapter 13 can fix this. 

The Problem

Let’s say you’re current on your mortgage, though barely hanging in there. But the bad news is that you’ve fallen behind on property taxes. With just about all mortgage contracts, simply being behind on property taxes puts you in default on the mortgage itself.

That’s because for you to fall behind on property taxes is very dangerous for the lender. The property tax creditor usually has a legal right to foreclose the property out from under your mortgage lender!  That would leave the lender without any collateral at all.

So your lender will itself likely pay your property taxes to avoid that from happening. The mortgage contract allows them to do this. Then if you don’t pay back those taxes to the lender it can foreclose, even if you are otherwise current.

When Chapter 7 “Straight Bankruptcy” Solves This Problem

Filing a Chapter 7 case can sometimes provide enough help. But that’s only if your bankruptcy filing improves your cash flow enough so that you would have enough extra money to catch up on the property taxes quickly enough.

How much time would you get to bring the property tax current? That depends on your mortgage lender. Ask your bankruptcy lawyer about this at your first meeting with him or her. This is part of deciding whether to file a Chapter 7 case, or instead the more powerful Chapter 13 one.

Again, the urgency is not usually with the county or whatever tax authority you owe directly on the property taxes. (That is, unless you have not paid the taxes for a few years.) In most places a tax foreclosure by the tax authority doesn’t happen until you have been behind on property taxes quite a while.

Instead the urgency is with your mortgage lender. It would rather not pay the money to cover the property taxes instead of having you do it. And then once your lender does pay the taxes, it wants you to pay it back fast. If you can’t catch up on the back taxes fast enough, you could lose your home to a foreclosure by the mortgage holder way before the tax authority would have foreclosed  directly.

With Chapter 13 You Buy Lots of Time

If you can’t satisfy your mortgage lender fast enough, Chapter 13 forces it to give you more time. In most cases you’d have between 3 and 5 years to catch up on the property taxes.

The direct and obvious benefit is that such a long period of time reduces the monthly catch-up payment amount. Catching up becomes more feasible, which makes keeping your home more likely.

The next benefit is the one we’ve been focusing on. The mortgage lender is stopped from enforcing its contractual condition that you be current on property taxes. It can’t foreclose on that basis, as long as you keep fulfilling your commitments under the Chapter 13 plan.

Similarly the tax authority itself is stopped from foreclosing, or from taking virtually any other kind of collection action.

With Chapter 13 You Likely Won’t Fall Behind on Property Taxes Again

A final benefit is that Chapter 13 helps prevent you from falling behind on property taxes going forward. This is extremely important for practical reasons. It doesn’t do much good to get as much as 5 years to catch up on property taxes if you’re going to start falling behind again during that period of time.

You won’t fall behind again because the budget you and your bankruptcy lawyer put together includes that expense. And if your circumstances change during the case, there is often room to change the budget and the plan payment.  So there should be room in your real month-to-month finances to keep current on future property taxes.

At the End of the Case

At the end of your Chapter 13 case you will be current on the property taxes, having paid off the original unpaid tax and any accrued interest, and having kept current on each year of new taxes during your case.  Your tax authority will be happy, your mortgage lender will be happy, and you’ll be happy.

 

A Second Mortgage “Strip” through Chapter 13

July 8th, 2016 at 7:00 am

“Stripping” off a second mortgage has major immediate and long-term benefits.

 

In a blog post last week we listed 10 ways Chapter 13 helps you keep your home. Here’s the second one of those:

2. Stripping Second or Third Mortgage

Under Chapter 7 you simply have to pay any second (and third) mortgages on your home or lose the home. However, Chapter 13 gives you the possibility of “stripping” that junior mortgage lien off your home’s title. This could potentially save you hundreds of dollars monthly. You could also end up paying just a fraction of the entire balance, or sometimes paying none of it all. That could save you many thousands or even tens of thousands of dollars in the long run.

How do you qualify for this junior mortgage lien “stripping”? The key factor is your home’s value. The second mortgage can be “stripped” from the home’s title if the entire value of the home is fully encumbered by liens legally superior to the second mortgage lien. “Legally superior” liens are those liens ahead of the second mortgage lien on the title.  All of the home’s equity is fully absorbed by liens ahead of it on the title. So the second mortgage debt is declared to be an unsecured debt, and is treated accordingly.

To bring this explanation to life let’s show how this incredible tool works by example.

An Example

Assume that your home is worth $200,000. It lost a lot of value during the “Great Recession” of 2008-2010 and hasn’t gained it back yet. You owe a first mortgage of $210,000 and a second mortgage of $18,000. The second mortgage has monthly payments of $250, with a bit more than 8 years to pay on it. It has a high interest rate of 8%—your credit wasn’t the best when you got this second mortgage loan.

Also assume that you were unemployed for a spell and so fell behind on both mortgages, as well as on other debts. You have a new job but it doesn’t pay as well as the earlier one, so you need help.

You very much want to keep your home. You’ve had it forever and it’s close to your new job. Home and apartment rents are rising in your area. You know that mortgage qualifying standards are tighter now than they were before the Great Recession. So for good reason you’re afraid that it would be a long time before you could buy a home again.

So you need a Chapter 13 “adjustment of debts” to catch up on your home obligations and to deal with your other debts.

“Stripping” Your Second Mortgage

In this scenario you’d be able to “strip” your $18,000 second mortgage off your home’s title through Chapter 13. Your bankruptcy lawyer would file special papers in the bankruptcy court to do so. Those papers would show that the home’s value—$200,000—is less than the amount of the first mortgage—$210,000. So all of the home’s equity is fully absorbed by the lien legally ahead of the second mortgage. As long as the bankruptcy judge accepts this to be true, he or she would declare the second mortgage lien to be “stripped” off your home’s title. Then the debt you owe on the second mortgage—the $18,000—would be treated as an unsecured debt.

The Great Benefits

A number of very good consequences would flow from this.

  • You could immediately stop making the $250 monthly payments. This would make it easier for you to pay the first mortgage’s monthly payments.
  • To the extent you were behind on the second mortgage, you would not need to catch up. This means that during your Chapter 13 case you could concentrate on catching up on your first mortgage. If behind on 6 payments of $250 on your second mortgage, that’s $1,500 you would not have to pay.
  • Your now-unsecured $18,000 second mortgage balance is treated in your Chapter 13 payment plan just like any other unsecured debt. That is, you’d pay it only as much as you could afford to during the 3-to-5-year life of the plan. In most plans there is only a certain amount available to pay all unsecured creditors. So adding the second mortgage balance often doesn’t increase what you pay into your payment plan. It’s not unusual for the second mortgage balance to be paid only a few pennies on the dollar. In fact, sometimes you pay NOTHING on that second mortgage balance (and on your other general unsecured debts).
  • At the end of your successful Chapter 13 case the entire unpaid second mortgage balance is “discharged”—legally written off. Assume for a moment that your payment plan allowed you to pay nothing on this second mortgage balance. Realize that the resulting savings would be substantially more than the $18,000 present balance. That’s because of the substantial amount of otherwise accruing interest that you would also avoid paying. The $18,000 balance at 8% with $250 payments would take a little more than 8 years to pay off, thus including about $6,600 in interest you’d also avoid paying.
  • Lastly, “stripping” the second mortgage off your home’s title would greatly improve your potential equity picture. Instead of owing $228,000 ($210,000 first mortgage + $18,000 on the second mortgage), you’d owe only $210,000. You’d be that much closer to building equity in your home as you paid down the first mortgage and as the home increases in value.

 

Keeping Your Home through Chapter 13

May 16th, 2016 at 7:00 am

Chapter 13 gives you much more time to catch up on your unpaid mortgage payments. That can be reason enough choose this option.

 

Filing either a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” one stops a pending home foreclosure. And they can both prevent one from begin started. Assuming you’re behind on your mortgage and want to keep your home, whether you should file under Chapter 7 or Chapter 13 depends on how far behind you are and how much help you need in catching up.

Protection through the “Automatic Stay”

Filing either a Chapter 7 or Chapter 13 case immediately imposes the “automatic stay” on your mortgage lender, and on all your other creditors. This is the federal law which stops and prevents (“stays”) virtually all collection actions against you or your property, including a home foreclosure.

Under Chapter 7 this “automatic stay” protection only lasts a short time, usually about three months or so. And the mortgage lender can even ask the bankruptcy court to cut short that protection.

Buying Some Time with Chapter 7

As we said in our last blog post, Chapter 7 usually lets you keep your home if you are current or not too far behind on your mortgage payments.

Most people who file a Chapter 7 case gain some monthly cash flow because they no longer have to pay some of their debts. Consider the Chapter 7 option if you want to keep your home and after filing bankruptcy you would have enough cash flow to make both your regular mortgage payments plus enough extra to be able to catch up on the late payments fast enough to satisfy your particular mortgage lender(s).

How much time you’ll have depends on the particular lender. About a year is a very rough estimate, but this varies widely so discuss this with an experienced bankruptcy lawyer to get a better idea what your lender will allow in your circumstances.

Buying a Lot More Time with Chapter 13

Instead of buying just a matter of a few months, Chapter 13 can usually give you as much as five years to catch up on your back mortgage payments.

If you are in foreclosure or anticipating that you will be soon, you could easily be tens of thousands of dollars behind on your mortgage. You may also be behind on property taxes and/or homeowner association assessments. You likely need as much time as possible to catch up on these. Stretching the repayment period out as long as five years can greatly reduce what you have to pay each month to catch up. This can make keeping your home much more feasible.

Not Need Lender’s Consent

Under Chapter 7 you are largely at the mercy of your lender regarding how much time you’ll have to get current. So you have to pay the necessary amount each month to accomplish that.

Under Chapter 13 you don’t rely on the cooperation of your mortgage lender. As long as you follow the law in how you and your lawyer put together the Chapter 13 payment plan, and then comply with that plan, the lender has little choice.

It can keep your feet to the fire to make sure you comply with the plan you propose and that the court approves. If you don’t pay as the plan says, you can still lose your home. But you’re much more in the driver’s seat, following a financial plan based on what your budget says you can afford to pay.  

Creative Flexibility

Not only do you get much more time to catch up on your mortgage(s), you also often get a fair amount of flexibility in how and when that happens in relation to your other pressing debts.

For example, let’s say you are also behind on your vehicle loan or child support. Depending on the amount of equity in your home and other factors, you may be able to pay such other even more urgent creditors ahead of or at the same time as you’re catching up on the mortgage.

Sometimes you may even be able to catch up on your mortgage in part or in full through a refinancing of your home. That refinancing may even be purposely delayed a couple years to allow for more equity to build up in your home.

Chapter 13 case comes with other kinds of flexibility. Your payment plan can from the outset reflect future anticipated increases in income or available funds, such as after a child starts school and a spouse begins making an income. That can make the payment plan easier in the meantime.

When financial circumstances change midstream, your Chapter 13 plan can usually be adjusted to reflect changes in your income and expenses.

These various kinds of flexibility make more likely that you can keep your home in the long run.

The Flexibility to Safely Change Your Mind

Your financial or life circumstances could change a year or two after filing your Chapter 13 case so much that you end up deciding you don’t want to keep the house after all.

For example you may get a new job out of the area, or a child may graduate from the local high school and leave home, so that keeping the home is no longer appropriate or necessary.

Under Chapter 13 you can change your mind and sell or surrender the home then, in a more financially protected way.  You can do so by amending the terms of your Chapter 13 payment plan, by converting your case into a Chapter 7 one to discharge any remaining debts, or even by simply dismissing (closing) your case if you don’t need its benefits any longer.

 

Keeping Your Home through Chapter 7

May 13th, 2016 at 7:00 am

Chapter 7 usually lets you retain your home if you are current (or not too far behind) on your mortgage payments (& other home-based debts).

 

Whether you can keep your home when filing a Chapter 7 “straight bankruptcy” mostly depends on two questions: 1) Are you current or close to current on your mortgage and other debts against your home, and 2) Is the equity in your home protected by the applicable homestead exemption?

Today we focus on your mortgage. Upcoming blog posts will hit other possible kinds of liens against your home, and then the homestead exemption.

Chapter 7 in General

When it comes to your home, Chapter 7 is designed for more straightforward situations with your mortgage and other home-related debts.

Under Chapter 7 if you want to you can generally keep possession of the collateral that is securing any of your debts. You just need to be current or at least close to current on that secured debt.

Whether the secured debt is a vehicle loan, furniture purchase contract, or home mortgage, if current or almost current you would usually be able to keep the vehicle, the furniture, or the home.

(Under most Chapter 7 cases you can usually also get out of owing anything on such secured debts by surrendering the collateral to the creditor. But today we’re focusing on keeping collateral, specifically your home.)

If Current on Your Mortgage

Do you want to stay in your home, are current on your mortgage payments, and will be able to keep up those payments after writing off all or most of your other debts? Then your home and your mortgage will very likely proceed through a Chapter 7 case smoothly without any change.

Compliance with Other Mortgage Requirements

You also need to be in compliance with other conditions of your mortgage contract. Two of the most common problematic ones involve keeping current on homeowner’s insurance and property taxes.

In most mortgage contracts, falling behind on either of these is considered a breach of the contract. So not being current on insurance or property tax constitutes separate legal grounds for foreclosure even if you’re current on the mortgage payments themselves.

This makes sense. If there’s no insurance in effect, your home could be destroyed in a fire and your mortgage lender would have virtually no collateral protecting their debt. If the property tax entity forecloses on the home, the mortgage lender would be foreclosed out along with you.

Often your monthly mortgage payment includes an “escrow” amount covering the homeowner’s insurance premium and property taxes. If so, then as long as you’re current on your mortgage you’re also current on these other obligations.  But sometimes the “escrow” payment only covers one of these, requiring you to pay the other on your own.

If Not Current on Your Mortgage But Not Too Far Behind

Even if you ARE a few months behind on your mortgage payments, you may still be able to file a Chapter 7 case. It depends.

A Chapter 13 “adjustment of debts” may be the better option if you are behind on your mortgage payments. It can also be better if you are behind on insurance or property taxes, have a second mortgage, or have other liens on your home, such as from income taxes or child/spousal support.

But a Chapter 13 case takes SO much longer than a Chapter 7 one—usually 3 to 5 years instead of about 4 months. It has other potential disadvantages as well. So you have some incentive to try to file a Chapter 7 case if you can.

In a Chapter 7 case your mortgage lender will almost for sure require you to catch up on any missed payments. Usually you will have to make your regular monthly payments PLUS enough extra each month to pay off the arrearage within a certain length of time. Usually you will be given no more than a year or so to catch up.

So, you and your attorney need to look closely at your after-bankruptcy budget to figure out how much you could afford to pay extra each month towards catching up. Hopefully since you’re no longer paying the debts being writing off in your Chapter 7 case you’ll be able to pay enough.

How Much Time to Catch Up?

How many months you’d have to bring your account current would naturally determine how much you have to pay in catch-up payments each month. And how much time your particular lender will allow depends on its policies and on your particular circumstances.

Your attorney, who deals with mortgage lenders about such matters every day, likely has experience with your lender and will counsel you about this.

Also, you may qualify for a loan modification—a re-writing of the mortgage terms. The balance is never reduced, but the missed payments could perhaps be wrapped into the new modified mortgage. Then you would no longer have to catch up on the missed payments, but just pay the new mortgage payments going forward. Again, ask your lawyer about the modification option.  

If You Can’t Afford to Catch Up Fast Enough

The reason that Chapter 13 can be a better way to save your home is that it gives you much more time to catch up on late mortgage payments. It can usually buy you as much as 5 years.

Plus as mentioned above Chapter 13 can help with other home- related debts, such as second (or third) mortgages, property taxes, and income tax liens.

Our very next blog post will address how Chapter 13 buys you more time if you need it.

 

A Fresh Start on Your Home with Chapter 13

January 22nd, 2016 at 8:00 am

Adjusting your mortgage and other home-related debts under Chapter 13 can often give your home the very best fresh start.

 

Our last two blog posts have been about two options for when you need help making mortgage payments: a mortgage modification and a forbearance agreement.

In a nutshell, a mortgage modification reduces the monthly mortgage payments through a permanent restructuring of one or more of the terms of the mortgage. A reduction in the principal amount of the mortgage debt is seldom included. So while modification can help in the short-term–if you’re fortunate enough to meet the relatively tight qualifying standards—be careful about what it costs you long-term.

With a forbearance agreement the monthly mortgage payments don’t change. The lender simply gives you a certain number of months to catch up on the unpaid mortgage payments, while at the same time you must also make your regular monthly mortgage payment.

So, mortgage modification addresses a permanent cash flow problem while a forbearance agreement addresses a shorter term cash crunch.

A Chapter 13 “adjustment of debts” can deal with either, in the right circumstances.

Chapter 13 vs. Mortgage Modification and Forbearance Agreement

From the start Chapter 13 is different from these other two options in one significant way—it’s not voluntary on the part of the mortgage lender. Instead of you trying to meet the lender’s qualification standards, you and your attorney put together a plan based on what serves your own best interests. Although you certainly have to follow some rules, you are given a lot of latitude as you do so.

For example, you do have to pay all the first mortgage arrearage before the end of the case, but you’re usually given 3 to 5 years to do so. That’s in contrast to a forbearance agreement which usually only gives you a few months, a year at the most.

And the amount you pay each month can vary depending on what other obligations may be more urgent for you. For example, if you have to catch up on a vehicle loan arrearage, or if you are behind on child support, those can usually be paid ahead of the mortgage arrearage. Or the amount paid on the mortgage arrearage can be reduced while you are paying certain other high priority debts or expenses. This kind of consideration for other debts would simply not be permitted in a forbearance agreement.

As for mortgage modification, you’re usually not required to catch up on the arrearage since that’s wrapped into the rewritten loan. With that advantage, and with a reduced monthly payment, modification can be better than Chapter 13.

Chapter 13 with Mortgage Modification

A mortgage modification can be the most effective in combination with Chapter 13, in a two respects.

First, a Chapter 13 case can help you succeed with a mortgage modification. Without collection pressure from your other creditors, you stand a better chance of getting past the modification’s trial period and getting a permanent modification. And by significantly reducing how much you pay your creditors each month, you will more likely be able to stick to the terms of the mortgage modification in the long run.

Second, a mortgage modification can help you succeed with your Chapter 13 case, in a couple ways:

  • A mortgage modification results in you paying less on your first mortgage as a result of lower monthly payments and no arrearage to catch up on.  With less to pay towards the mortgage, that leaves more to pay other high-priority debts—such as recent income taxes and child support arrearage—that must be paid in full in a Chapter 13 plan in a maximum of 5 years. This means that a plan that would have been difficult to pay off in time becomes more feasible.
  • Similarly, with less money going towards the mortgage because of a modification, a plan that would have taken up to 5 years could be shortened to 3 years. Your income during the months before filing determines whether you plan must run a minimum of 3 years or 5 years. But even if you are only required to pay for 3 years, you are allowed to stretch the plan longer to reduce the monthly payment and better fit your budget. You’ll more likely be able to finish in 3 years if your monthly mortgage obligation is less, giving you more money to pay into your Chapter 13 plan. 

 

A Fresh Start with a Forbearance Agreement

January 20th, 2016 at 8:00 am

Whether you’re about to fall behind on your mortgage or have already done so, a forbearance agreement avoids foreclosure while you catch up.


Quick Definition

A forbearance agreement gives you short-term relief to deal with a temporary period of financial hardship. Your mortgage lender agrees, either in advance or after the fact, to accept a period of reduced or suspended monthly payments in return for your agreement to return to full monthly payments and catch up on the missed payments within a certain length of time. The lender agrees to not foreclose—to “forbear” from foreclosing—as long as you make the agreed regular and catch-up payments. You are given this grace period to bring the mortgage current and then return to making just the regular monthly payments.

Compared to Mortgage Modification

Forbearance agreements are usually much easier to qualify for and quicker to negotiate with the lender. After all you are not changing most of the terms of the mortgage—almost always the regular monthly payment, the interest rate, and the length of the overall mortgage don’t change. You’re just forgiven for a period of time of being in default on the payments, and are then required to catch up relatively quickly. A forbearance agreement does not make your mortgage more affordable long-term, but rather gets you back in good graces with the same mortgage you signed up for originally.

In contrast, a mortgage modification changes the terms of the mortgage to make it more affordable long-term, by reducing the monthly payment. But besides being relatively difficult to qualify for and process, mortgage modifications usually don’t reduce the principal amount you owe but rather make it somewhat easier to pay, with a reduced interest rate or a longer term (for example, 40 years instead of 30). See our last blog post for more about mortgage modifications.

The Relatively Rare Solution

So forbearance agreements are only appropriate for that relatively rare situations  in which you only miss a few months of mortgage payments and then get to a point in which you can not only afford the regular payments again but also pay a significant amount extra each month to catch up on the missed payments within a relatively short period of time.

The amount of time to catch up varies with each mortgage lender and the circumstances of each case. Periods of 6 to 10 months are common, seldom more than a year.

Take the example of a mortgage with a monthly payment of $1,500. If the homeowner missed 5 payments because of a job loss, he or she would be $7,500 behind on the mortgage. After the lender starts a foreclosure, the homeowner finds steady employment and negotiates a forbearance agreement to catch up on that $7,500 over the next 10 months. He or she would have to make the regular $1,500 monthly payment plus $750 extra every month for 10 months. During those 10 months the foreclosure would be put on hold. At the end of that time the homeowner would be current on the mortgage and the foreclosure would be canceled.

Forbearance Agreements and Bankruptcy

For most people, coming up with the extra monthly amount—the $750 in the above example—is impossible because of other debts. So forbearance agreements are often used together with Chapter 7 “straight bankruptcy.” Paying the catch-up payment can be much more feasible if you don’t have to pay most or all of your other debts at the same time.

Forbearance agreements do not usually work with Chapter 13 “adjustment of debts” payment plans. Instead Chapter 13 is often used instead of forbearance agreements if you simply don’t have the cash flow to make the catch-up payments that your lender would require of you. Chapter 13 can usually allow you to catch up over a much longer period of time—3 to 5 years instead of a year or less with a forbearance agreement. Stretching out the catch-up payments under a Chapter 13 plan lowers that monthly amount significantly. Chapter 13 may also allow you to stop payments on a second (or third) mortgage, give you longer to catch up on any back property taxes or homeowner association dues, and deal better with income tax liens or other obligations tied to the home. We’ll address the Chapter 13 option more thoroughly in our next blog post. 

 

Chapter 7 and Chapter 13–Stripping a Second (or Third) Mortgage

October 21st, 2015 at 7:00 am

Stripping a mortgage from the title to your home could save you a tremendous amount of money.

 

 

Two blog posts ago our topic was getting rid of judgment liens, which can be done under either Chapter 7 “straight bankruptcy” or 13 “adjustment of debts.” So if you have a judgment lien (or two) on your home’s title, that will not push you towards one Chapter or the other.

But stripping a second mortgage can only be done through Chapter 13. Because stripping a mortgage from your home’s title can save you so much money, it is often the major reason to file under Chapter 13 instead of Chapter 7.

The Benefit of Stripping Your Second and/or Third Mortgage

If you qualify to remove, or strip, a mortgage from your home’s title, you would not have to pay that mortgage’s monthly payments, would likely pay only a fraction of that mortgage, and get much closer to building equity in your home. Under the right conditions, you can get rid of the debt you owe on a second or other junior mortgage, and get rid of the lien on your home’s title securing that debt.

You can do this by filing a Chapter 13 case if the value of the home is less than the amount owed on the your first mortgage plus any other liens that are ahead of the mortgage being stripped (such as for property taxes or a homeowners’ association).

Lien Stripping

Usually in bankruptcy a lender’s rights to its collateral are respected and protected. For example, if you want to keep your vehicle you have to pay the lienholder. So it’s both unusual and very beneficial to you to be able to get rid of a junior mortgage debt as well as its mortgage lien on your home.

Stop Monthly Payments

If you file a Chapter 13 to strip your second or third mortgage you immediately no longer have to make the monthly payments on that mortgage. And if you were behind on those mortgage payments, you do not have to catch up on those payments.

Improve Your Equity Position in Your Home

If you can get strip a second or third mortgage doing so can bring you much closer to creating equity in your home.

An example will show you how this works. If you had a home worth $200,000, with a first mortgage of $210,000 and a second mortgage of $30,000, you could likely strip that second mortgage through Chapter 13. Instead of having a negative equity of $40,000 ($10,000 from the first mortgage plus $30,000 from the second), after the lien strip the negative equity would be only $10,000, bringing the home much closer to building equity through future increases in the value of the home.

What Happens to the Debt Owed on the Stripped Mortgage?

Chapter 13 allows you to treat the debt being stripped of its mortgage like a “general unsecured” debt.  Those are debts with no lien on anything you own, which are paid only as much as your budget enables you to pay during the life of your 3-to-5-year Chapter 13 case, which is often not very much.

That’s because you are allowed, indeed required, to pay your secured debts and “priority” debts ahead of the “general unsecured” ones. Secured debts include vehicle loans and first mortgage arrearage. “Priority” debts include, for example, income taxes that are not old enough to be discharged (written off), any child and spousal support that you’re behind on, and other legally important debts.

As a result the debt on your mortgage that’s being stripped is usually paid only a few pennies on the dollar, and sometimes nothing at all.

Furthermore, because in most cases you only have to pay a certain amount to the entire pool of your “general unsecured” debts, adding your mortgage debt to that pool usually doesn’t increase what you have to pay in “general unsecured” debts.

For example, let’s say your budget over the course of your 3-year Chapter 13 payment plan requires you to pay—beyond what you are paying to secured and “priority” debts—$5,000 to the pool of your “general unsecured” debts. Imagine that you owe $20,000 in credit card and medical debts, and $30,000 on a second mortgage being stripped. Without that second mortgage debt, the $20,000 in credit card and medical debts would be paid 25%—$5,000 out of the $20,000 owed. When you add the $30,000 second mortgage debt to this pool of “general unsecured” debts the pool increases to $50,000. Paying the same $5,000 during the 3-year plan towards this $50,000 in debt results in the debts now being paid only 10%—$5,000 of the $50,000 owed. The amount you would pay—$5,000—would not change; it would just be spread out over more debts, without costing you any more.

At the Successful Completion of Your Case

Once you get to the end of your Chapter 13 case by having paid whatever your court-approved payment plan required of you, your second (or third) mortgage lien is stripped off your title. Whatever portion of that mortgage that has not been paid through the Chapter 13 payment plan is then discharged—legally written off. Your home no longer has that mortgage on its title or any of that debt against its equity.

 

Mistakes to Avoid–Selling Your Home without First Stripping the Second Mortgage

September 9th, 2015 at 7:00 am

Selling Your Home without First Stripping the Second Mortgage

 

One way that bankruptcy—Chapter 13 in particular—could save you a tremendous amount of money is with a second (or third) mortgage strip.

 

If you have serious financial pressures inducing you to sell your home, is it partly because of your second (or third) mortgage? Would you it help if you did not have to make that payment anymore? Would you be able to keep your home, maybe even permanently, if you could stop paying that second or third mortgage (or both) and also get relief on your other debts?

If your home is worth no more than what you owe on your first mortgage, that is what the Chapter 13 “adjustment of debts” version of bankruptcy could accomplish for you. That and get you much closer to building equity in your home again.

Secured vs. Unsecured Debts

Debts are either secured by something you own or they are unsecured. Secured debt includes your vehicle loan, contract purchases of furniture and appliances, sometimes secured credit cards, as well as various kinds of debts secured by your home. Debts secured by your home can include not only first, second and third mortgages, but also any property taxes you owe (almost always the first debt against your home’s title, even ahead of your mortgage), sometimes debts to a homeowner’s association, income tax and child/spousal support liens, sometimes judgment and utility liens, and possibly construction liens for any home renovation or repairs.

With many of the kinds of secured debt owed by consumers, the collateral secures only one debt. You generally owe only one vehicle lender secured by your vehicle, for example. As you can see from the list at the end of the paragraph just above, that’s often not true of your home. You can owe a string of creditors secured by your home.

What if your home is worth less than the various creditors that are secured by your home? Are all of them really secured by your home when the home is not worth enough to cover all that debt?

Turning a Secured Second Mortgage into an Unsecured Debt

Chapter 13 enables you to turn your second mortgage into an unsecured debt if your home is worth less than the debts legally ahead of that second mortgage on your home’s title. The law effectively acknowledges that all of your home’s value is eaten up by liens that are ahead of the second mortgage, leaving no equity at all for that debt, making it an unsecured debt.

For example, if your home is worth $200,000, you are $2,000 behind in property taxes, owe $205,000 on your first mortgage, and owe $50,000 on your second mortgage, because the taxes plus first mortgage is more than the home’s value ($207,000 vs. $200,000), through Chapter 13 you could “strip” the $50,000 second mortgage off your home’s title.

Turning a Secured Third Mortgage into an Unsecured Debt

This works with a third mortgage as well, if you have one. If your home is worth no more than the debts legally ahead of that third mortgage—usually any past-due property taxes, the first mortgage balance plus the second mortgage balance—through Chapter 13 you could “strip” that third mortgage off your home’s title.

For example, if your home is worth $250,000, you are $2,000 behind in property taxes, owe $205,000 on your first mortgage and $50,000 on your second mortgage, and also have a $15,000 third mortgage, because the taxes plus the first and second mortgages are more than the home’s value ($257,000 vs. $250,000), the $15,000 third mortgage can be turned into an unsecured debt.

What Happens to the Stripped Second or Third Mortgage Debt?

As long as the court determines that indeed the home is not worth enough to secure ANY PORTION of the second or third mortgage being stripped, you do not have to pay that monthly mortgage any longer. You don’t have to catch up if you’re behind. The debt that had been secured by that mortgage is treated like any other unsecured debt under Chapter 13. It is lumped in together with your other unsecured debts—medical bills, credit cards, unsecured personal loans, and such—and these are all only paid as much as you can afford to pay on this lowest priority category of debts during the three to five years that your case lasts. Since often much of your available income is needed to catch up on your first mortgage, pay income taxes, and maintain your vehicle payments, often the unsecured creditors—including what you owe on the stripped mortgage—are paid only pennies on the dollars.

Then at the end of your successful Chapter 13 case, the second or third mortgage (and sometimes both) lien is permanently taken off your title, and whatever you owed and didn’t pay through the case is permanently written off. You’ve not needed to sell your home out of desperation, and you’re a lot closer to building equity in it again.

 

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