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Archive for the ‘Selling Your Home’ Category

Buy Time to Sell Your Home with Chapter 13

October 20th, 2017 at 7:00 am

If you are behind on your mortgage, and are thinking of selling your home, you can often delay selling for many months or even for years. 

 

Our last blog post was about the relatively long time Chapter 13 gives you to catch up on your mortgage. Besides the 3 to 5 years it gives you, Chapter 13 also protects you while you’re also dealing with other important debts. So filing a Chapter 13 case is a powerful way of buying time and gaining flexibility for your home.

That is just as true if you want to sell your home instead of keep it. Chapter 13 can buy you time and flexibility. You can often prevent being rushed into selling when the markets not right. You can prevent having to sell when doing so causes personal or family hardships. ln many circumstances, you can hold off on selling your home for many months, and even years. You will have to pay your mortgage in the meantime but you may be able to hold off on paying some or all of missed mortgage payments until the sale.

We’ll give you two examples when this can be extremely helpful.

First Example

Assume that you are 5 months behind on your mortgage payments and just got a notice of foreclosure. You’d lost your job a half year ago and just started at a new one for slightly lower pay. After discussing the situation with your bankruptcy lawyer you’ve decided that it’s best that you sell your home.  But your home has a lot of deferred maintenance, mostly superficial tasks that you can do, but it’ll take time. You’d like to spend the next 6 months getting the home ready. Plus it’s right around the corner from the winter holiday season, not a good time to get the best price. You’d like to list the home for sale in the spring when the most buyers are in the market. Plus, home prices have been rising in your neighborhood so a delay would likely increase your sale proceeds.

If you filed a Chapter 7 “straight bankruptcy” case there’s a serious risk you’d lose the home and its equity. Your mortgage lender would likely push to proceed with its foreclosure unless you’d start making catch-up payments right away. You could barely afford the regular mortgage payments so that wouldn’t likely happen. Usually Chapter 7 would not be a good option.

The Chapter 13 Solution

So how does Chapter 13 “adjustment of debts” buy you more time and flexibility here? 

Your Chapter 13 payment plan would propose having you make full regular mortgage payments right away. That would include insurance and property taxes, to protect the lender in those ways. You would agree to list the property for sale in 6 months. The equity you have in the property would protect the mortgage lender now. The sweat equity you’ll be putting into the property, plus the increasing property values, would keep the lender protected for the next 6 months and then through the home selling process.  The bankruptcy court would very likely approve such a plan.

You’d work hard to get the house ready for sale until the spring. You’d make only the regular monthly payments on the mortgage. (Plus you’d be paying a plan payment on all the rest of your debts, usually much, much less than you’d be obligated to pay otherwise.) You’d put the house on the market as agreed. When it sells you’d pay off the remaining mortgage debt, including the missed payments.

What you’d do with the remaining proceeds of sale depends on the circumstances. In some situations you might use it to pay off all the rest of your debts. Or you could use all or part of it for your upcoming home or apartment rental. Or it might even make sense at that time to convert your case into a Chapter 7 one. In any event, you would have succeeded in your goal of buying time to sell your home in a way and at a time that would maximize the money that you could get out of it.

Second Example

Assume a similar situation except that you want to wait two or three years to sell the home. You don’t want to sell before then for important personal or family reasons.  Maybe you have a kid or two in the neighborhood schools and don’t want to move them. Or maybe that’s when you can downsize because of kids moving out. Or you and/or your spouse will be ready for retirement in that time. These personal reasons may be combined with wanting the home to build more equity before you sell it.

Delaying a sale for that long is possible in the right circumstances. It may require making partial catch-up payments, especially if there’s not much of an equity cushion. It would very likely require being fastidious in keeping current on the property taxes and insurance, and the regular payment, at the risk of foreclosure if you don’t. These all depend on the facts of your case. In any event it is not unusual for Chapter 13 plans to allow for a home sale a year or two or even longer after the filing of the case.

Conclusion

Chapter 13 could allow you to put off selling your home until the time is right for you. If the home has some meaningful equity, you may even be able to delay paying some or all of the missed mortgage payments until selling the home. So in the meantime you wouldn’t have to worry about a pending foreclosure or other pressures from your mortgage lender. Instead you could focus your financial energies on making the regular monthly mortgage payments, and any other high-priority obligation(s) being handled in your payment plan. Then you’d sell your home in an orderly way that would serve you and your overall financial and personal game plan.  

 

Flexibility in Selling Your Home through Chapter 13

July 11th, 2016 at 7:00 am

If you are behind on your mortgage and want to sell, you may be able to delay the home sale for years and pay the arrearage out of the sale.

 

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

3. Much Greater Flexibility in Selling Home

If you want to sell your home while in the midst of a lot of financial pressure, Chapter 7 “straight bankruptcy” does not buy you much time. It protects you and your home from your mortgage lender for at most only about three or four months. In contrast, a Chapter 13 “adjustment of debts” potentially protects you for years until you’re ready to sell.

You may need to sell your home for financial or personal reasons, but want to delay doing so.  For example, you may want to wait until a kid finishes high school or you reach an anticipated retirement date before you’re ready to move. Even if you’re behind on your mortgage, Chapter 13 can often enable you to delay selling until you’re ready.  

Here’s an example to show how this works in practice.

The Example

Assume that because of injuries from a vehicle accident you were temporarily disabled and couldn’t work.  As a result you fell behind on your home mortgage loan by $10,000—8 payments of $1,250 per month.

You are now back at work but earn only enough income to be able to afford the $1,250 monthly mortgage payment. You don’t have enough cash flow to begin to catch up on the $10,000 you’re behind. Nor do you have any savings to pay that $10,000, or anything to sell to raise that much money. Your mortgage lender is threatening to foreclose if you don’t bring the account current.

The home is worth $225,000, the mortgage balance is $175,000, and home prices in your area are currently rising steadily. The homestead exemption that applies to your home in your state is $35,000.

Your employer is planning on opening a new regional center in another state in two years. It offered you an incentive to move your job there; you decided to accept because you have family there. You want to delay selling your home until when that job move in two years.

Chapter 7 Won’t Likely Solve the Problem

If you file a Chapter 7 “straight bankruptcy” it’ll help but often not enough. You would be able to stop paying most of your debts right away. Many of those debts would be legally written off—“discharged”—in bankruptcy forever. That may buy you enough monthly cash flow so that you could pay something to your mortgage lender each month towards catching up on the $10,000 arrearage.

So if you and your bankruptcy lawyer could make arrangements with your mortgage lender to catch up as fast as the lender would require you to, then Chapter 7 may well be what you need. But at $10,000 behind, that would likely require monthly payments around $1,000. And that would be IN ADDITION TO the regular monthly $1,250 mortgage payment.

If you couldn’t catch up fast enough to satisfy your lender, then Chapter 7 wouldn’t help you enough. It wouldn’t enable you to hold off on selling your home for 2 years. It almost for sure wouldn’t let you avoid catching up on your mortgage arrearage for that long. If you couldn’t satisfy your mortgage lender fast enough, your home would be foreclosed.

Chapter 13 Buys You Time to Sell Your Home

In contrast, a Chapter 13 case could potentially protect your home for years until you’re ready to sell.

In the usual case, if you are in arrears on the mortgage your Chapter 13 payment plan would have to earmark enough in monthly payments towards that arrearage so that you brought the account current by the time the case was completed. That usually gives you 3 to 5 years to catch up.

If there is equity in your home (such as in this example), you can likely hold off making catch up payments for a while. You DO have to make the regular monthly mortgage payments as soon as your case is filed. Falling any further behind DURING the case is considered very inappropriate.  But if you have a significant equity cushion, and especially if market values are rising, you’re given more flexibility about when you have to catch up on the mortgage.

When, as in our example, you know when you want to sell your home, you and your lawyer can incorporate that into your Chapter 13 payment plan. You would likely be able to hold off on paying towards the arrearage in the meantime. Or, if you can afford it, you might want to make modest payments towards the arrearage. That way you would have more equity and get more money out of your home when you do sell two years later.

Conclusion

Chapter 13 would likely allow you to put off selling your home until the time is right for you. If the home has some equity, you may even be able to delay paying any or most of the mortgage arrearage until doing so out of the anticipated proceeds of the sale. This would allow you to focus your financial energies in the meantime on making the regular monthly mortgage payments, and on any other high-priority obligation(s).

 

Chapter 7 and Chapter 13–Child and Spousal Support

November 6th, 2015 at 8:00 am

Unpaid support is the highest priority of the “priority” debts. Chapter 7 frees up money to pay it. Chapter 13 buys you time to do so.

 

In our last blog post we said that, very broadly speaking, if none of your unsecured debts are “priority” ones, you’d lean towards filing a Chapter 7 “straight bankruptcy” case.  And if you did have a “priority” debt, or more than one, and the amount owed is relatively large, you’d lean towards filing a Chapter 13 “adjustment of debts” case.

The reason is that Chapter 7 usually discharges (legally writes off) ordinary unsecured debts quickly, but doesn’t have much power over “priority” debts like Chapter 13 does.

A debt for unpaid child or spousal support provides a great example.

Ongoing vs. Past-Due Support

Let’s first make clear what debt we’re talking about. We’re NOT talking about trying to change child or spousal support obligations that are not yet due. You have to go back to the domestic relations court to change (reduce or eliminate) your support obligations going forward, if you have grounds to do so.

Instead the debt we’re talking about is the amount of support that is past-due at the time you file your bankruptcy case.

The Sacred Debt

Other kinds of “priority” debts can be discharged under certain circumstances. For example, past-due income taxes can usually be discharged after just waiting a few years.

But not past-due support. It cannot be discharged at all in either a Chapter 7 or Chapter 13 bankruptcy.

So can either bankruptcy help here at all?

Some but Very Limited Help in Chapter 7

The only way Chapter 7 helps is indirectly, by discharging all or most of your other debts so that you can afford to catch up on your unpaid support.

In some circumstances you or your attorney can negotiate terms for catching up with your ex-spouse or with the support enforcement agency handling the matter. If getting rid of your other debts gives you the financial ability to enter into such a negotiated arrangement, Chapter 7 would be the way to go.

Chapter 7 Limitations

But often there isn’t room for negotiation. The ex-spouse or support enforcement agency may be no longer willing to negotiate payment terms. Or, filing a Chapter 7 case may not free up enough money in your monthly budget to catch up as needed. Sometimes you have other troublesome debts—a mortgage heading for foreclosure, income taxes, student loans, a past-due vehicle loan—which continue being owed after you’d finish your Chapter 7 case. They would suck up your money not leaving enough to cure your past-due support debt fast enough.

The huge related practical problem is that Chapter 7 does nothing to stop your ex-spouse or support enforcement from continuing or starting collection efforts against you. The “automatic stay” which stops most other creditor collection efforts does not apply in Chapter 7 to support obligations. So you have no leverage and no protection.

Significant but Conditional Help in Chapter 13

That’s the big difference with Chapter 13. IF you strictly follow certain conditions, the collection of past-due support obligations IS stopped by a Chapter 13 filing. And they continue being stopped throughout the 3-to-5-year course of the Chapter 13 case as long as those conditions continue being met.

The conditions are:

  1. The Chapter 13 payment plan earmarks enough money to pay the back support debt in full.
  2. You pay any ongoing monthly support payments on time, especially the first ones due after the Chapter 13 case is filed.
  3. You pay your monthly Chapter 13 plan payments on time throughout the case, since that’s how the past-due support payments will be paid.

If you follow these conditions your ex-spouse and the support enforcement agency will not be able to take any collection actions against you during the case. And by the end of the case you’ll be current on the support, and will be free and clear of all other debts other than any still ongoing monthly support and perhaps other long-term debt (such as a home mortgage).        

 

Chapter 7 and Chapter 13–Delayed Sale of Your Home

November 2nd, 2015 at 8:00 am

In a Chapter 13 case you can schedule to sell your home as part of the court-approved plan, or leave it more flexible.

 

In our last blog post we described briefly how Chapter 13 can often give you tremendous flexibility about the timing of the sale of your home. Here we expand on your options.

A Scheduled Home Sale

If you definitely plan on selling your home and you know when you want to do so, you can build your Chapter 13 plan around that sale. Depending on your situation, you may be able to schedule selling your home anytime during the following 5 years, the maximum length of a Chapter 13 payment plan.

The main benefit of incorporating your intended sale into your formal plan is that doing so allows you to pay certain creditors out of the expected proceeds of the sale. That usually allows you to pay less to creditors during the rest of your case.

For example, if at the time you file your case you are $10,000 behind on the first mortgage and filed the Chapter 13 case to prevent a foreclosure, you would normally have to catch up on all of that $10,000 through monthly payments during the 3-to-5-year case. But if you schedule the intended home sale for, say, two and a half years after the case is filed, you would often be able to pay all or most of that $10,000 out of the proceeds of the sale. This assumes that there is good indication that you will have sufficient equity in the home at the time of the sale to pay that $10,000 or so then.

There are two major advantages of this.

First, you could pay other important and/or time-sensitive debts instead during the time before you sell your home. For example, if you fell behind on child or spousal support payments, you could catch that up and avoid the very aggressive collection efforts of your ex-spouse or the support enforcement authorities. Or if you qualify for “cramdown” of your vehicle loan, you could all or most of your vehicle loan.

And second, paying your home arrearage through the expected sale proceeds allows you to keep your monthly Chapter 13 plan payment lower. Because your budget will allow you to pay only so much monthly into your plan, being able to pay most of the mortgage arrearage out of the later expected home sale may enable you to afford to save your home through Chapter 13.

A Possible Home Sale

But you may not be sure if you want to sell your home. And you may not have a financial need to structure your Chapter 13 plan around the anticipated proceeds of the sale in the way just described. So at the beginning of your case your formal payment plan would be designed around the assumption that you would keep your home. But you would be aware that you could sell your home later during the case, depending on how your personal and financial life evolved in the meantime.

The benefit here is that you keep your options open. If you would be catching up on your first mortgage during this time, and maybe the property taxes as well, and the value of your home would be increasing, your home equity would be increasing at an accelerated rate. If doing so fits into your life, you could sell the home at some point in your case, and put that equity to good use.

You may be able to sell the home but remain in your Chapter 13 case to complete it after amending your monthly payment plan, likely with lower payments.

Or you may be able to use the proceeds of the home sale to pay off your Chapter 13 plan. And if that’s structured and timed right, you would often not have to pay any more to your creditors than if you had not sold the home.

Selling After Converting to a Chapter 7 Case

One of the benefits of being in a Chapter 13 case is the ability to “convert” it into a Chapter 7 “straight bankruptcy” case at virtually any time.

For example, if your initial goal is to stay in your home because of family or job reasons, but those reasons shift because of a divorce or job loss, you could convert into a Chapter 7 case and sell your home right after that was completed 3 or 4 months later.

Or if one of your motivations in filing a Chapter 13 case was to sell after your home increased in value, you might convert into a Chapter 7 case if after a year or two the market was not doing as well as you’d hoped.

Selling After Your Chapter 13 Case is Finished

You would also have the option of waiting until your Chapter 13 case is finished and sell your home after that. The big benefit here is at that point you would likely be well positioned to sell your home. If you “stripped” a second or third mortgage that would no longer be on your title. Judgment liens would be also cleaned off the title, as well as any income tax liens. You would have had the length of your case to increase the value of your home. And you would likely owe no debts except the home mortgage. You could sell your home, clear yourself of any remaining debt and be fully debt-free.

 

Chapter 7 and Chapter 13–Selling Your Home in the Near Future and Protecting Its Increased Equity

October 30th, 2015 at 7:00 am

Have the flexibility to sell your home when you want, giving time for it to add equity, while keeping creditors away from that equity. 

 

 

If you are feeling overwhelmed by debts and wondering if you should file bankruptcy, and if in the midst of this you own a home, you might also be wondering whether you should be selling it. Let’s assume that you’d rather not sell right now, because it’s not the right time for personal or family reasons. Or maybe the home doesn’t have much equity now but its value is increasing and so you think it will likely have significantly more equity two, three years from now.

But the problem is that you have creditors threatening to sue you, get judgments and put liens on your home, eating up any equity that’s there now and any future equity as well. How can bankruptcy help here?

The Chapter 7 Solution

Our last blog post was about the advantages under Chapter 7 “straight bankruptcy” if you currently have some equity in your home but no more than is protected by the homestead exemption. Assuming you were current or close to current on the home’s mortgage(s), you could keep your home and its equity would be protected from your creditors. Pending lawsuits would be stopped and future ones would be prevented, avoiding judgment liens against your home. Judgment liens that were already on your home would likely be removed. All that would happen within about 3 or 4 months after your Chapter 7 case was filed. Then you could sell your home immediately afterwards, or later if you wanted to wait for a better time or after the home’s value increased.

When Chapter 7 Doesn’t Help Enough

But what if you are way behind on your home’s mortgage(s), on its property taxes, or homeowners’ association fees? Or what if you have debts that would not be discharged (written off) in a Chapter 7 case, such as recent income taxes, back child or spousal support, or student loans?

In these situations Chapter 7 doesn’t help enough. Having a little equity in your home doesn’t help if you are behind on the mortgage, property taxes, or homeowners’ association fees, all of which could result in your home being foreclosed out from under you. And debts that aren’t discharged could become liens against your home after the Chapter 7 case is over, sometimes giving their creditors the ability to foreclose, and at least their liens eat up your equity.

The Chapter 13 Solution

These two sets of problems are both solved by instead filing a Chapter 13 “adjustment of debts,” allowing you to protect your home’s present and anticipated equity.

First, if you are behind on a mortgage, property tax, or homeowners’ association obligation, filing a Chapter 13 case will prevent the creditor from taking action against you and your home while giving your 3 to 5 years to catch up on that mortgage, tax, and/or obligation. Under certain circumstances you’d get significant advantages, such as being able to “strip” your second (or third) mortgage so that you would no longer need to make the monthly payment and could write off most of the balance, setting your home up for future building of equity. Or you could “avoid” judgment liens—remove them from your home’s title—freeing up equity that they were tying up.

Second, if you owe debts that can’t be discharged in a Chapter 7 case, such as income taxes or support arrearage, in most situations those types of creditors would be stopped from taking any collection action against you while you paid the obligation, again over 3 to 5 years, through payments that fit your budget. You would get various breaks with many of these kinds of debts. For example, with income taxes, usually no future interest and penalties would accrue once you filed your Chapter 13 case, reducing the total you’d need to pay. Income tax liens on your home would be resolved in beneficial ways, minimizing what you’d need to pay on them before they were released from your home’s title.

Selling When You Want

Chapter 13 often gives you tremendous flexibility about the timing of the sale of your home.

When you file a Chapter 13 case or very shortly thereafter, you and your attorney put together a formal payment plan, laying out your intentions with all your creditors. That plan goes through a bankruptcy court approval process, with limited opportunities for creditors to object. If you are intending to sell your home during the 3-to-5-year length of the Chapter 13 plan, you could state in your plan when you intend to do so, what creditors you would pay when that happens, and then what the rest of your payment plan would look like afterwards up to the completion of your case.

This allows you to, in the right circumstances, to hold off paying some creditors until when you sell your home. Holding off selling the home could well give you more equity to work with when you do sell. You could also have more equity then because of removing certain liens on the home as mentioned above.

Or if you are just considering selling your home down the line and are not yet sure about it, you would not necessarily say anything about that in your Chapter 13 plan. Instead you would put together a payment plan assuming that you’d keep your home, giving you time for your personal/family/employment situations to play out, as well as to see whether your home value increases.

Then you could decide a couple years into your Chapter 13 case to amend your payment plan and sell your home, if that is in your best interest. You may be able to complete your case with the sale or else finish off the case after you sell.

Or instead you could wait until the completion of your case and sell at any point afterwards.

Or finally at any point during your Chapter 13 case you could convert it into a Chapter 7 case and sell your home a few months later as soon as that was finished.

We’ll talk about these delayed selling options in our next blog post in a couple days. But you can see how Chapter 13 can be a tremendously flexible way to keep your creditors at bay while you address your obligations in a manageable way, and while keeping open your options for selling your home.

 

Chapter 7 and Chapter 13–Selling Your Home with Equity but Have Lots of Other Debts

October 28th, 2015 at 7:00 am

Protect the equity in your home from your creditors through either of the consumer bankruptcy options.

 

 

If you have some equity in your home bankruptcy may enable you to keep that equity—to help your transition into a rental, to buy another home, or to put it into retirement.

Today we’ll look at how that works under a Chapter 7 “straight bankruptcy” and then next time under Chapter 13 “adjustment of debts.”

Without Bankruptcy

If you have some equity in your home and you owe more other debts than you can handle, that equity is likely in jeopardy. Your creditors and debt collectors can easily find out about that equity and are all the more quick to sue you in order to latch onto it. In most states a lawsuit that turns into a judgment becomes a lien on your home. That means that once the lien is recorded, when you sell your home the debt has to be paid in full, usually with a large amount of additional fees added to it.

Judgment liens must generally be paid in the order that they are recorded, which motivates creditors to sue you and get their judgment before other creditors.

Depending how much equity you have, you could easily lose all your equity and potentially still owe a lot of unpaid debt. That’s because the earlier judgments are paid in full until the equity runs out, leaving other creditors unpaid—those who’ve sued you and those who haven’t.

So when you sell your home you can end up with no equity, no home, and still a lot of debt.

Chapter 7 and the Homestead Exemption

Our last blog post was about what happens under Chapter 7 and Chapter 13 if you have “too much” equity in your home, meaning more equity than is protected through your homestead exemption. Today we assume you have no more equity than is protected by the homestead exemption. Generally you would be filing a Chapter 7 case only when that is true. (Please see our last blog post for a rather thorough explanation of homestead exemptions.)

A Chapter 7 case usually takes only 3 or 4 months to complete. During that time the Chapter 7 trustee determines, on behalf of all your creditors, whether the amount of equity in your home is indeed no more than is protected by the applicable homestead exemption. As long as you and your attorney have prepared the case appropriately this will not be a problem.

Assuming the trustee agrees that the home and its equity is exempt and protected, you will be able to keep the home and the equity in it. Either all or most of your other debts will be discharged—permanently legally written off—so those creditors can never again pursue the equity in your home.

Stopping Judgment Liens from Hitting Your Home

If you are currently being sued, or are concerned that you will be, filing a Chapter 7 case will stop an ongoing lawsuit from going forward and will prevent a new lawsuit from being filed against you. That means that as long as the debt is one that will be discharged in a Chapter 7 bankruptcy (which includes the vast majority of debts), a judgment will not be entered against you and a judgment lien will not be recorded against your home. So your equity will be protected.

Getting Rid of Judgment Liens So You Get the Home Equity

About two weeks ago we explained how certain judgment liens can be “avoided,” or nullified, even after being recorded against your home. Unlike many bankruptcy tools affecting your home which can only be used under Chapter 13, judgment lien “avoidance” is available under Chapter 7 as well.

So if you currently have one or more judgment liens against the title of your home, filing a Chapter 7 case could well take the anticipated proceeds of sale of your home out of the pockets of these “judgment lien creditors” and give that money to you instead.

Getting Rid of Oher Debts So That You Keep the Equity

Since your debts will be discharged in a Chapter 7 case so quickly (or at least most of your debts, and often every one that you want discharged), you will be able to keep all of the proceeds of sale when you sell your home after the bankruptcy case is finished. You won’t have to spread it out among your creditors.

That means that if you need the sale proceeds to move to a rental home or apartment, or to buy a manufactured home or even a mobile home to live in (or how about a boat!), you will be able to.

You may instead want to use that money to pay off a vehicle, to pay for some transition training or education, or possibly to supplement an inadequate amount of retirement funds. If you and your attorney structure it right, you would likely be able to use the money for these purposes.

Selling Your Home before/after the Chapter 7 Bankruptcy

You DO need to be careful about some timing issues, and sometimes about the uses of the proceeds of sale. For example, in some states you could have already sold your home BEFORE the bankruptcy was filed and the homestead exemption might still protect the sale proceeds, but only under certain conditions. You might have to use the sale proceeds for a new homestead, but that may be broadly interpreted to include advance home rental payments or a mobile home you intend to live it.

These kinds of issues turn very much on the details of the homestead exemption(s) applicable to your case—potentially either your local state law or federal law. You clearly want to get advice from an attorney who specializes in consumer bankruptcy law and deals with these kinds of issues all the time.

 

Mistakes to Avoid–Selling Your Home Because You Owe Income Taxes

September 21st, 2015 at 7:00 am

If you owe a bunch of income taxes, and have a tax lien on your home, it’s tempting to try to fix everything by selling your home.

 

This series of blog posts is about how to make better decisions about selling your home when under pressure from your creditors. Some of the biggest pressure can come from the IRS and the state taxing authorities. There are some persistent misconceptions are about how bankruptcy can and can’t help with income taxes and income tax liens.

If You Have Income Tax Debt

If you owe back income taxes, especially if you owe for a number of tax years or owe a large amount, or both, you may feel like you’re in a vicious cycle. You keep hoping that you’ll get on top of the problem but it seems to get worse. Maybe you’ve put off filing tax returns, hoping to fly under the radar of the IRS and state. Or you’ve entered into a monthly payment plan for a prior year or two of taxes but know you’ll owe more with your next tax return and that will break your payment plan. You may have already had a tax lien recorded against your home or are afraid that will happen any day. And the interest and tax penalties keep on piling on.

Misconceptions about Income Taxes and Bankruptcy and Your Home

The law about income taxes is notoriously complicated. What bankruptcy can do about tax debts can be confusing and so people have many misassumptions. Add in issues about tax liens on real estate and understandably it’s difficult to know which end is up.

The “Discharge” (Legal Write-off) of Income Taxes

Bankruptcy can discharge tax debts just like most other debts, as long as the tax fits certain conditions. Those conditions mostly involve how old the tax is and whether and when you’ve filed the tax return for the tax.

Basically, if the tax return for the tax was due more than 3 years ago and you filed the tax return more than 2 years ago you can discharge the tax by filing a bankruptcy case. That could be either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.

In a Chapter 7 case the tax would usually just be discharged within a matter of 3 or 4 months without paying anything at all on that tax debt (just like a medical bill or credit card debt).

In a Chapter 13 case you may have to pay a portion of the tax debt over the course of your 3 to 5 year payment plan, but often it’s only a small portion or sometimes nothing. Chapter 13 can also give you great advantages with more recent taxes that can’t be discharged, with tax liens, and with your home mortgage and other home-related debts.

Dealing with Tax Debts that Can’t Be Discharged

If you owe income taxes that don’t meet the 2 year/3 year condition stated above so that they can’t be discharged in bankruptcy, both Chapter 7 and Chapter 13 may still be able to help a lot.

Chapter 7 can discharge all or most of your other debts so that you may be able to afford to enter into a reasonable payment plan with the IRS/state for the payoff of the income taxes. That may be particularly true if some of the taxes you owe ARE old enough to discharge and some are not, so that you only need to arrange to pay for those taxes that survive bankruptcy. Your attorney can often help you determine a game plan to maximize how much taxes you can discharge and minimize how much you have to pay.

Same thing under Chapter 13. But with Chapter 13 you also have the benefit of usually not needing to pay any further ongoing interest and penalties on any taxes that can’t be discharged during the 3 to 5 years of your payment plan. In addition you have great flexibility about when and how fast you pay off those taxes, with your budget dictating the terms instead of the IRS/state doing so. You can often pay other even more important debts—such as back child support, your home mortgage arrearage, and even vehicle loan payment—ahead of the taxes.

The Danger of Tax Liens

When the IRS or state record a tax lien against your home, it’s both a serious bad mark on your credit standing and very dangerous for your home. That tax lien hurts your ability to sell or finance your home. The IRS/state could foreclose on the tax lien to force payment in full. And if a tax lien has not been recorded against your home yet, there’s a degree of arbitrariness about whether and when that would happens so understandably you’re always on edge afraid of that happening.

The Benefit of Bankruptcy with Tax Liens

If you do owe taxes and own a home but no tax lien has been recorded, and you file a Chapter 7 case and discharge that tax debt, you will never owe that tax again and no tax lien can ever be recorded against it. If you file a Chapter 7 case and a tax is not discharged but you enter into a payment plan for that tax often no lien will be recorded as long as you stick by the terms of the payment plan and the tax owed is below a certain amount.

If you file a Chapter 13 case and comply with the payment plan that you and your attorney put together, the IRS/state cannot record a tax lien throughout the 3 to 5 year case. You don’t have to worry about your home being exposed to those dangers. So if you owe income taxes and have not yet had a tax lien recorded, that’s a huge benefit to Chapter 13. That’s also still true if you’ve had a tax lien recorded as to SOME of your tax debts but NOT as to some other (usually more recent) tax debts.

Where Chapter 13 really shines is with tax liens that have already been recorded. Usually the taxes owed that are secured through a tax lien on your home have to be paid in full before the lien will be released off your home’s title. That’s true almost no matter how old the tax is.

But under Chapter 13 if the tax is old enough to that it can be discharged, and there is no equity in your home to cover the tax lien, then the bankruptcy court can in effect declare that the tax be treated as if there is no tax lien. The tax debt would be throw in with the rest of your general unsecured debts, with all of them paid no more than what your budget allows, which is often not much given what other debts do have to be paid (such as more recent income taxes and/or mortgage arrears). Then at the end of the case the part of that income tax debt that was not paid would be discharged (along with all your other general unsecured debts) and the tax lien would be released from your home.

If the tax is old enough to be discharged but there is some equity in your home to cover only SOME of the tax amount, under Chapter 13 ONLY that portion would have to be paid—the IRS/state would not be able to pressure you to pay the full tax as would happen outside of bankruptcy.

And if the tax with the tax lien against it is not old enough to be discharged in bankruptcy, under Chapter 13 you would pay that tax in full—and even with interest if there is equity in your home at least as much as the amount of the tax. You would not pay any interest (or penalties) if there was no equity covering the amount of the tax. But what’s crucial here is that throughout the payment process the IRS/state would not be able to enforce that tax lien. They could not pressure you to pay the tax faster by threatening to foreclose on your home.

Selling Your Home

It may or may not be in your best interest to sell your home when you owe income taxes. If the tax debt is your primary motivation to sell, there’s a good chance you either don’t need to sell or you could sell months or years later when that sale would better fit into your personal or family circumstances.

It may be wiser to sell after you’ve discharged most of your debts through a Chapter 7 case, including some or perhaps all of your income taxes. That could prevent a tax lien from being recorded against your home, resulting in more money for you out of the proceeds of sale.

It may be wiser to sell after filing a Chapter 13 case, again preventing a tax lien from being recorded, or after getting previously recorded tax lien released from your home’s title.  

It is surely wiser to understand all the many ways that either type of bankruptcy can help you and your home before rushing to sell your home to pay tax debts that you either don’t have to pay or can deal with in a much better way.

 

Mistakes to Avoid–Selling Your Home Because You Can’t Afford the Mortgage Payments

September 18th, 2015 at 7:00 am

Could you afford your home if you didn’t have to pay your other creditors or didn’t have to pay second mortgage payments?

 

This series of blog posts is about how to make better decisions about whether to sell your home and when, if you are under pressure from your creditors.

If You Really Shouldn’t Be in this House

You may in fact need to sell your home if it’s more house than you need, or its cost is way beyond your present financial abilities. Buying this house may have been a mistake that needs to be corrected. Or your circumstances may have changed so that now its way more of an obligation than your budget can handle. You may be looking forward to less financial pressure every month and know in your heart you need to sell and sell quickly.  

Acting from Fear vs. Wisdom

There’s a lot of emotion involving a person’s home. That’s true if you are single living alone, and is amplified if you are living with a spouse or significant other, and especially if you have children living with you. Issues of responsibility, success, and success are tied into the “American Dream” of owning a home. There are also all kinds of practical issues like the neighborhood you live in, how far it is from your job, and where your kids go to school.

Considering how emotion- and ego-laden issues swirling around your home tend to be, it’s especially important to be very well informed about your legal options so that you can make rational, sensible, and indeed wise decisions about it. Your fears and impulses can easily be based on misconceptions about what you can and cannot do with your home-related debts and your other debts.

Keeping Your Home or Selling it Later

Again, you MAY indeed need to sell your home and do so as quickly as possible. But, if there are some sensible reasons why you would prefer to keep your home, or to sell it not now but months or years from now, there may be ways to do so. There may be tools that you weren’t aware of to accomplish your financial and personal goals involving your home.

Reducing Your Other Debt Expenses

There are countless misconceptions about what debts can or can’t be written off, or “discharged,” in bankruptcy. Some debts that generally can’t be—like income taxes or student loans—sometimes can. Some that can’t be in a Chapter 7 “straight bankruptcy”—like non-support debts to your ex-spouse—can be in a Chapter 13 “adjustment of debts.” Some debts that can’t be discharged in either kind of bankruptcy can be paid over a long stretch of time under Chapter 13, such as unpaid child or spousal support, or your first mortgage arrearage. Encumbrances now on your home’s title, such as judgement liens and income tax liens, can be addressed and removed in creative and often inexpensive ways. And as we’ll see in a moment, sometimes you don’t have to pay a second or third mortgage.

It simply makes sense to find out whether in fact there are legal mechanisms enabling you to keep your home permanently, or for a period of time until it’s the right time for you to sell.

“Stripping” Your Second (or Third) Mortgage from Your Home

One of the most dramatic ways that you may be able to lower the cost of keeping your home, and for improving your prospects for selling it later, is the mortgage “strip.” We spent an entire blog post last week describing how this works, so please read about it there.

In a nutshell, under Chapter 13, if your home is worth less than what you owe on it BEFORE your second (or third) mortgage, the debt on that mortgage can be turned from a secured to an unsecured debt. This means that you would not have to make the monthly payment any longer, and you would usually not have to pay much or even anything on the balance. At the end of your case the entire remaining balance would be written off permanently, and that mortgage would be “stripped” off your home’s title.

Consider what that could do for your ability to afford your home, and to sell it if and when you want instead of when you are feeling pressured to do so.

 

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Mistakes to Avoid–Selling Your Home under Pressure instead of Waiting until a Better Time

September 11th, 2015 at 7:00 am

Bankruptcy can buy you a few more months or even several years, so you can sell your home when you’re financially and personally ready.

 

Selling under Pressure

If you are being pushed to sell your home quickly because of serious financial pressures, please know that there’s a good chance that there’s a way to get rid of that pressure and sell the home on your own schedule.  

Selling on somebody else’s schedule is no good. Whether it’s because of an upcoming foreclosure or the threat of one, or because of overall creditor problems, it’s understandable that you want to try to cut your losses by getting out from under your biggest debt. But selling hurriedly means that your home is probably not getting the market exposure to sell for its highest price.  There are lots of important financial and personal considerations that should govern your decision, not creditor demands.

Waiting to Sell for Financial Reasons

If you weren’t feeling forced to sell now, but had the opportunity to sell when you were ready, you could benefit financially in a bunch of ways.

First, as just mentioned you could get full value out of the home instead of selling it at a desperation price. It could go on the market priced right, gauged to sell within a reasonable amount of time but to a buyer more willing to pay on the high end of the home’s value.

Second, if your home is appreciating in value relatively quickly—as homes are in many parts of the country right now—holding off selling for a year or two may be highly worthwhile. You may be able to build some equity if you don’t have any now. Or if you do have some equity now, building some more could give you the ability to pay off some special creditors that would not be written off in bankruptcy, like recent income taxes or unpaid child or spousal support.

Third, bankruptcy itself comes with tools that can make selling during or after your bankruptcy case financially much better for you. This is especially true with Chapter 13 “adjustment of debts.” For example, see our most recent blog post of a couple days ago about “stripping” second or third mortgages off your home’s title, which may gain you tens of thousands of dollars.

Waiting to Sell for Personal Reasons

Here are some to the personal reasons that in normal circumstances would likely be the main reason you’d be selling your home. Consider whether it would make more sense for you to hold off on selling your home until one of these reasons is primarily motivating you to sell at that time.

  • You’re downsizing because your kids have left the family home.
  • You’re ready to pursue a job opportunity somewhere else, perhaps after finishing some current re-training or schooling or after getting a certain amount of experience at your present job.
  • You’re getting married or moving in with a significant other.
  • You’re getting divorced and are both leaving the marital home.
  • You or your spouse have reached retirement and want to downsize.

Buying Time under Chapter 7

Chapter 7 “straight bankruptcy” buys you time in two ways.

First, if your home is facing foreclosure, filing a Chapter 7 case with the right timing would stop an immediately pending foreclosure sale.  At some point that foreclosure would likely be rescheduled, anywhere from weeks or month later, but the time it buys may be crucial.  

Most Chapter 7 cases last only 3 or 4 months, and the “automatic stay” protection from foreclosure lasts only that long. In fact a mortgage lender may ask the bankruptcy court for permission to proceed with the foreclosure before the case is over. On the other hand, once a Chapter 7 filing stops a foreclosure sometimes the lender takes no further action to foreclose for quite a few months.

So if you have a home sale in process with a looming foreclosure is jeopardizing it, filing a Chapter 7 case may buy you enough time to complete that sale

Second, if you can’t afford your home then writing off all or most of your other debts under a Chapter 7 case may make your home more affordable, at least for long enough until you sell the home. So, if you’ve been able to keep current on your mortgage payments (likely by not paying other debts), getting rid of those other debts would more likely allow you to stay current until you were ready to sell. And if instead you were behind on your mortgage, you may be able to enter into a “forbearance” agreement getting the lender to “forbear” from starting a foreclosure as long as you kept up on an agreed catch-up payment plan. You may be all the more motivated to make those payments since doing so would likely create more equity for you on an accelerated basis for when you do sell the home later.

Buying Time under Chapter 13

A Chapter 13 case can usually buy you much more time than a Chapter 7 case. Depending on your circumstances your home sale could occur many months or even a few years after the time your case is filed.

The “automatic stay” protection from foreclosure (and from most other creditor collection actions) seldom lasts more that 3 or 4 months under Chapter 7 BUT lasts 3 to 5 YEARS in a Chapter 13 case. You often have to do a lot to maintain protection that long, and preventing the lender from getting court permission to foreclose on the home. Usually you have to continue or re-start making the monthly mortgage payments, plus usually something paid towards any arrearage. You have to maintain liability insurance on the home, and usually keep up on property taxes and any ongoing homeowner association dues.

If this sounds difficult realize that Chapter 13 generally allows you to pay your mortgage and other home-related debts ahead of most if not all of your other creditors. Most of your creditors could well receive little or nothing so that you could afford your home-related debt payments.

Also, if your home has equity—especially a good cushion of equity—then you may be able to put off catching up on any mortgage arrearage (and possibly other debts secured by the home) until the time when those are paid in full out of the proceeds of that future home sale.

Conclusion

How much time either a Chapter 7 or Chapter 13 case would give you before you would have to sell your home depends on many circumstances. We’ve touched on a few here but please see a local bankruptcy attorney for a thorough analysis of your situation.

 

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