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Chapter 13 Really Helps Delay Your Home Sale

October 14th, 2019 at 7:00 am

Chapter 13 gives you much more power over your mortgage and other home-related debts so that you can sell your home when it’s best for you. 

 

Our last blog post was about using Chapter 7 “straight bankruptcy” to buy time to sell your home.  The advantages of Chapter 7 are that it’s usually quite quick and costs less that Chapter 13. It also importantly focuses on your present income and on the present value of your home. If you expect either your income or your property’s value to increase substantially, Chapter 7 could be your better option.

Chapter 7 Disadvantages—Buys Limited Amount of Time

However, Chapter 7’s quickness can often turn into a disadvantage. If you’re behind on your mortgage, or another home-related debt, the protection Chapter 7 provides against them doesn’t last long. The “automatic stay” protection lasts—at most—only 3-4 months, because that’s how quickly most cases finish. If within that time you don’t work out payment arrangements with them, they can start or resume collections and/or foreclosure.  

So Chapter 7 often doesn’t give you much additional time to sell your home.

Chapter 7 Disadvantages—Buys Limited Leverage with Ongoing Creditors

Also, if your mortgage holder or other home-related creditor refuses to negotiate, you have almost no leverage under Chapter 7. Not only does automatic stay protection expire within just a few months, the creditor can often speed up that timetable. Chapter 7 doesn’t give you any other strong tools directly against your mortgage holder or home lienholder. Mostly what it does is discharge (write off) other debts so that you can focus on your home creditor(s). If that doesn’t buy enough time to sell your home, than Chapter 7 is probably not your best solution.

Chapter 13 Advantages—Buys Much More Time and Leverage

A Chapter 13 “adjustment of debts” case buys you time and flexibility if you want to keep your home and are behind on your mortgage and/or other home-related debts. Basically it does so by protecting you and your property while you catch up in 3 to 5 years.

These are all also true if you want to sell your home but need more time to do so. Chapter 13 can often prevent you from being rushed into selling when the market is not the best for selling. For example, instead of being forced to sell during the holiday season you could sell during the prime spring season. Or hold off on selling when doing so now would cause personal or family hardships. ln many situations you could delay selling your home for many months, or even years.

The Power of Chapter 13

The way this works is that you and your bankruptcy lawyer put together a monthly payment plan covering the next 3-to-5-years.  This plan goes through a 2-3-month bankruptcy court approval process. The plan would show how you’d make progress towards catching up on your mortgage and other especially important debts. Usually you’d pay general unsecured debts only as much as you can afford to pay them after paying other more important debts. Often these unsecured debts don’t receive much, sometimes nothing.

Your payment plan would likely refer to your intent to sell your home, if that was to happen during the 3-to-5-year period. You’d have to pay your monthly mortgage in the meantime. And usually you’d have that same length of time to catch up on a first or second mortgage. Same thing if you were behind on property taxes or anything else that was a lien on your home’s title. This can often enable you to delay selling your home for years.

What if you couldn’t afford to catch up within even the 3-to-5-year length of a Chapter 13 payment plan? Under some circumstances you wouldn’t have to pay that much. If there is enough equity in the home, you could pay less towards catching up on the mortgage (property taxes, etc.) and just pay the remaining amount out of the proceeds of the intended home sale.

Conclusion

Chapter 13 could enable you to delay selling your home until the time is right for you. If your home has a healthy equity cushion, you could catch up on some or all of the missed mortgage payments (or property tax arrearage or some other home-secured debt) until you sell the home. In the meantime as long as you fulfill the terms of the court-approved payment plan, you wouldn’t have to worry about a pending foreclosure or other collection pressures. Instead you could focus on making the regular monthly mortgage payments and Chapter 13 plan payments. And then sell your home at a time that serves you best. 

 

Bankruptcy Helps Delay Your Home Sale

October 7th, 2019 at 7:00 am

When you need a rather quick solution, Chapter 7 can deal with your creditors and buy you time to sell your home, in the right circumstances. 


Our last several blog posts have been about using bankruptcy to either prevent various kinds of liens hitting your home or deal with those liens if they happen. For example, in the last few weeks we’ve addressed, in reverse order:

  • Protecting your  home from homeowners’ association dues and assessment liens
  • Addressing child  and spousal support liens
  • Preventing income tax liens through Chapter 7 and Chapter 13
  • Dealing with already-recorded income tax liens
  • Preventing judgment liens, and removing them if they’ve already attached to your home

So clearly bankruptcy gives you a multitude of tools to help you preserve your home and its equity.

It can do even more. In the midst of dealing with all your debts, bankruptcy can buy you time to sell your home. Let’s show you how, starting with Chapter 7 today, and Chapter 13 next week.

Chapter 7 Advantage—It’s Quick

Chapter 7 “straight bankruptcy” is quick.

Its quickness helps a number of ways. Chapter 7s are less complicated to prepare and almost always cost you less. So, practically speaking, you can usually go from your initial meeting with your bankruptcy lawyer to filing bankruptcy, faster.

This can be crucial in at least two sets of circumstances.

First, you’re up against some kind of debt-collection or possession-losing event that bankruptcy needs to stop. This can be related to your home, such as the start or the beginning of a mortgage foreclosure. Or it can be unrelated, such as a collection lawsuit against you, a paycheck garnishment, or vehicle repossession. You need to quickly file bankruptcy to stop a creditor from hurting you.

Second, you need to prevent some kind of lien from hitting your home. Preventing an income tax lien or judgment lien, for example, can, under some circumstances, mean the difference between not paying the underlying debt at all and paying it in part or in full.

Chapter 7 Advantage—It Focuses on the Present

The other big Chapter 7 advantage is that it focuses on your situation at the moment of filing. This is important as it applies to your assets and income.

Regarding your assets, Chapter 7 fixates—for most purposes—on your assets and their value at the moment of filing. It generally does not care about future assets (again, with rare exceptions).

This can be crucial when dealing a home that’s increasing in value. You may be getting close to having the maximum allowed equity for your applicable homestead exemption. Assume, for example, that your home is worth $250,000, you owe $230,000, and your state has a $25,000 homestead exemption. So you’d currently have $20,000 in equity ($250,000 minus $230,000). That equity amount can go up quickly if your property’s value is increasing, plus you’re paying down your mortgage (and maybe other liens against the home). Next year you may have too much equity to file a Chapter 7 case. Filing now lets you protect your equity now, and then it can grow freely after you’ve gotten your fresh start.

Regarding your income, Chapter 7 fixates—again for most purposes—on your income at the time of your filing. Future income, including increases in income, is generally outside of the reach of your creditors and the Chapter 7 trustee.

Buying Time to Sell Your Home

With all this in mind, how does Chapter 7 buy you time in selling your home?

Consider two scenarios. One, you’re current on your mortgage, and second, you’re far behind.

Buying Time When Current on Your Mortgage

First, assume you are current or close to current on your home’s mortgage. The amount of your equity is less than your homestead exemption amount. You are being battered by creditors, and if you don’t act quickly bad stuff will happen. So you’re tempted to sell your home to reduce your cost of living or to get at its equity. But you either don’t want to sell, or for personal or family reasons you’d rather wait to do so.

A Chapter 7 filing would prevent or stop virtually all lawsuits and garnishments. It could prevent judgment liens and income tax liens and support liens against your home. Judgment liens that are already on your home likely could be removed. Previously recorded income and support liens could be better resolved with your greater cash flow. You’d likely be better able to afford your mortgage and other home-related costs. All that would happen either immediately or within about 4 months after your bankruptcy lawyer filed your Chapter 7 case.

Buying Time When Behind on Your Mortgage

Second, assume instead that you are not current on your mortgage but rather you’re far behind and facing foreclosure. You definitely want to sell your home but you’ve run out of time. You’re about to lose your home to foreclosure.

Chapter 7 buys you some time. Instead of losing your home—and any equity you may have in it—to foreclosure, you stop the foreclosure. You gain a few precious months to either close a pending sale or to make a sale.

Or if you are not that close to foreclosure, filing bankruptcy may improve your monthly cash flow enough so that you and your lawyer can negotiate a “forbearance agreement” with your mortgage lender. This is a payment plan for catching up on the mortgage arrearage (and maybe any late property taxes). Then, anytime either during that payment plan or afterwards, you could sell your home.

You may even be able to work that into the forbearance agreement. You could agree to relatively smaller monthly catch-up payments, and then pay off of the remaining arrearage and the entire mortgage balance from proceeds of the house sale.

 

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.

 

Many Ways to Buy Time for Your Vehicle and Home through Chapter 7

November 1st, 2017 at 7:00 am

Chapter 7 buys you the crucial time you need in many situations when falling behind in your obligations related to your vehicle or your home.

 

In the last several weeks of blog posts we’ve given many examples of how bankruptcy can buy you time for your vehicle and for your home. Here’s a summary how a Chapter 7 “straight bankruptcy” can do so.

1. Chapter 7 Buys Time for Your Vehicle

  • Stops your vehicle from being repossessed, at least temporarily
  • Gives you a some limited amount of time to catch up if you’re behind on payments
  • Gives a very limited time to reinstate required vehicle insurance
  • Gains you some time to get another vehicle before surrendering your present one
  • Buys time to gather funds to redeem your vehicle for less than you owe on it
  • Buys time to enter into a redemption loan to lower your debt on the vehicle

2. Chapter 7 Buys Time for Your Home

  • Stops your immediate home foreclosure sale, at least temporarily
  • Gives you limited time to catch up on your mortgage through a lump sum payment or in monthly “forbearance” payments
  • A delay in foreclosure usually gives you a few more months to sell your home
  • This delay can give you time to surrender your home while saving up for moving expenses
  • Stops  a lawsuit from turning into a judgment lien, creating a debt that can’t be discharged written off in bankruptcy
  • Stops an income tax lien recording on your home’s title, potentially turning that tax into one that can’t be written off

 

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.  

 

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.

 

Buy Time for Your Home with Chapter 7

October 13th, 2017 at 7:00 am

Filing a Chapter 7 bankruptcy case stops a foreclosure and buys some time to either arrange to keep the home or move in a peaceful way.  

 

Chapter 7 “Straight Bankruptcy” vs. Chapter 13 “Adjustment of Debts”

Speaking very generally, Chapter 7 buys you some time with your home while Chapter 13 buys you much more time.

So the questions are: how much more time to do you need and will Chapter 7 buy you enough?

How Chapter 7 Helps

As to your home, your filing of a Chapter 7 case:

1. Stops a pending foreclosure sale of your home, at least temporarily, through the “automatic stay.” Your bankruptcy filing stops “any act to… enforce any lien against property of the estate.” “Property of the estate” includes essentially everything you own at the time of filing, including your home. See Section 362(a)(4) and (5) and of the U.S. Bankruptcy Code. How much time Chapter 7 buys depends on your situation, as we’ll get into a bit below.

2. It also at least temporarily stops not just foreclosures by your mortgage company, but also by other lienholders. This includes foreclosures for unpaid property taxes, homeowner assessments, or judgment lien creditors. In the case of judgment liens, Chapter 7 may also get rid of them, and the debt underlying it.

3. Prevents, at least for a few months, most kinds of new liens from attaching to your home. So an income tax debt does not turn into a tax lien. A pending lawsuit does not turn into a judgment lien against your home. This is particularly helpful if that tax is old enough to qualify for discharge (legal write-off). And most likely the debt underlying the lawsuit can be discharged. In these situations Chapter 7 protects your home from those debts and anticipated liens.  

Situations When Chapter 7 May Be Enough

Here are some of the main situations when it’s worth filing a Chapter 7 case for your home.

A Scheduled Mortgage Foreclosure

You already have a scheduled foreclosure date, and it’s coming very soon. Your Chapter 7 filing will very likely cancel it. The “automatic stay” protection lasts throughout the 3-4 months that your case is open. So your mortgage lender can restart the foreclosure after that. But the delay may be much shorter if your lender asks the bankruptcy court for permission to restart the foreclosure while your Chapter 7 case is still open. So it depends on the aggressiveness of your lender. Filing under Chapter 7 may buy you an extra few weeks or an extra few months.

  • If you are selling your home and are close to selling it, those extra weeks or months may be all you need to finish the sale and pay off the mortgage.  This only works if the net sale proceeds—your money from the sale—are fully covered by your homestead exemption. Then you keep those proceeds. Otherwise the Chapter 7 trustee would have a right to any proceeds in excess of the homestead exemption.
  • You’re surrendering your home but need to buy more time to gather funds for moving and rental expenses. Your lender might possibly even pay you to move faster (to save itself foreclosure expenses).

 An Anticipated Mortgage Foreclosure

A foreclosure sale date has not yet been scheduled but you think it’ll happen soon. Your Chapter 7 filing will postpone it. As stated above, your mortgage lender can ask the court for permission to proceed with the foreclosure. So how much time your bankruptcy filing buys depends on your lender.

A Debt Expected to Turn Into a Lien

You’re not concerned about a mortgage foreclosure, but rather about a debt turning into a lien on your home. As discussed above, if this is a debt that would be discharged in bankruptcy, Chapter 7 can be hugely helpful. Your Chapter 7 filing stops the placing of the lien, discharges the debt forever, and thus avoids the lien forever.

Even if the underlying debt cannot be discharged—such as a relatively recent income tax debt—your Chapter 7 filing stops the lien at least temporarily. Your bankruptcy case then discharges most or all of your other debts. At that point you can focus your financial efforts on paying the tax. Entering into a formal payment plan may prevent a tax lien from being recorded.

Summary

A Chapter 7 case filed through your bankruptcy lawyer may give you less power than a Chapter 13. It usually only buys you a relatively short amount of time. But the limited power and time it does give may be enough in your particular situation. And it may enable you to discharge a debt, preventing that debt from resulting in a lien on your home.

 

The Option of Surrendering Your Home Later in a Chapter 13 Case

August 24th, 2016 at 7:00 am

As you decide whether to use the powerful tools of Chapter 13 to hold onto your home, it helps to know that you can later change your mind.  

 

Our last blog post was about surrendering your vehicle in a Chapter 13 “adjustment of debts” case.  One major advantage we discussed is being able to change your initial decision about keeping your vehicle if circumstances change.

This can be even more beneficial when dealing with a home because of the much greater amount of money involved. When you’re considering whether to use the tools of Chapter 13 to save your home, it is important to know what would happen if circumstances changed a couple years later and you decided to let go of the home.

Some of the Home-Saving Tools of Chapter 13

Here are just a few of the potential benefits of Chapter 13 “adjustment of debts” if your goal is to keep a home on which you’re behind:

·         You usually get the whole length of your 3-to-5-year Chapter 13 payment plan to catch up on late mortgage payments.
·         You are given the same length of time to catch up on any late property tax payments.
·         Judgment liens on the home can often be “avoided”—gotten rid of.
·         Second mortgages can sometimes be “stripped” off your home’s title.

An Example of These Tools at Work

Imagine that you and your spouse own a home currently worth $215,000. Its first mortgage balance is $225,000 and the second mortgage balance is $20,000. Their monthly payments are $1,000 and $300, respectively. Because of losing your job a year ago you’re 6 months late on both mortgages, $6,000 and $1,800 behind, respectively. Plus you haven’t paid last year’s property tax bill of $2,000.

Six months ago you and your spouse were sued by a collection company on n unpaid hospital bill. A year earlier your spouse had emergency appendix removal surgery, and there were complications, aggravating a prior condition.  The unpaid balance is for the portion not paid by insurance. You didn’t respond to the collection lawsuit, and judgment for $10,000 was entered against the two of you. You’ve heard that there is now a judgment lien in the amount of $10,000 against your home.

You also owe $50,000 in other medical bills plus credit cards, all past due. Some of these creditors have threatened to sue you.

You have two kids who attend and are very active at their local public high school. If you had to leave your home you would not be able to afford another home within the school district. Your kids would have to change schools, something you and your spouse absolutely want to prevent.

A couple months ago you finally got a new job at the local plant of a large nationwide corporation. The position looks to be reliable, although you’ve heard rumors that the plant may close in a year or two. Also, the medical insurance coverage provided is not great. Since your spouse’s health situation continues to be tenuous, the high deductibles and co-pays leave you feeling financially exposed.

Your Legal Options

You and your spouse meet with a bankruptcy lawyer to find out your legal options. The lawyer tells you that a Chapter 7 “straight bankruptcy” filing would:

·         very likely “discharge”—legally and permanently write off—the $10,000 lawsuit debt
·         remove the judgment lien from your home’s title
·         discharge the $50,000 in other medical debts and credit cards
·         not directly affect the two mortgages or the property taxes on your home

Your lawyer carefully reviews your after-Chapter 7 budget and advises you that, under present circumstances, the two of you do not have enough disposable income to catch up on your first and second mortgage and your property taxes. So if you filed a Chapter 7 case you would have to surrender your home to your mortgage lenders. You’d have to do so within a few months.

However, you would not have to pay the mortgage payments in the meantime. So you could save money for future rent after you leave. And you’d never have to catch up on either mortgages, or on the property taxes. That alone would save you $6,000, $1,800, and $2,000, respectively, a total of $9,800.

The Chapter 13 Option

Your lawyer also informs you that if instead you wanted to keep your home, you could do so through a 5-year Chapter 13 payment plan. But that assumes your present income and expenses would remain steady. But you have genuine concerns as to the reliability of your job and the ambiguities of your spouse’s health.

So your lawyer also explained that Chapter 13 gives you the additional benefit of being able to keep your home for a few years and then surrender it only if your circumstances changes—such as if your income went down or your expenses went up—or if keeping your home because less important—such as after your kids graduate from the local high school.

See our next blog post to learn how this delayed home surrender works.

 

Protect Equity in Your Home Better with Chapter 13

August 1st, 2016 at 7:00 am

If your home is exposed to your creditors and to the Chapter 7 trustee because it has too much equity, Chapter 13 can protect that equity.  

 

In our July 1 blog post we gave a list of 10 ways that a Chapter 13 “adjustment of debts” case can help you keep your home. Today we’re on the 10th one on that list. This one’s about saving your home and its equity when that equity is larger than the allowed homestead exemption.

We took a detour in our very last blog post by showing how sometimes filing the simpler Chapter 7 case can still let you keep your home in this situation. But the circumstances that will work are quite rare. So it important to understand how to protect otherwise unprotected equity through Chapter 13.

Here’s how we introduced this earlier as it pertains to Chapter 13.

10.  Protect Equity in Your Home NOT Covered by the Homestead Exemption

Having too much equity in your home is a problem if you owe a lot to creditors.  “Too much equity” means equity more than the amount the homestead exemption protects. Creditors can sue and get judgments against you, resulting in judgment liens attached to that home equity.

If you file a Chapter 7 “straight bankruptcy” case you run the risk of the bankruptcy trustee taking and selling your home to pay the unprotected portion of the proceeds to your creditors.

Under a Chapter 13 “adjustment of debts,” in contrast, you can keep and protect the home and its equity. You pay a certain amount of those debts gradually over the course of the up-to-five-year Chapter 13 case.

Here’s how this works in practice.

The Example

Assume the following facts:

  • You own a home that is worth $275,000.
  • Your mortgage loan on that home is $195,000, so you have equity of $80,000.
  • The homestead exemption available to you is $50,000. This means that you can protect that much of your home equity. (The homestead exemption amount varies greatly from state to state. But let’s assume it’s $50,000 in this example.)
  • You owe $15,000 in income taxes for last year and the year before.
  • You owe $75,000 in credit cards and personal loans, plus $25,000 in medical bills. So you have a total of $100,000 in debts other than the home mortgage.
  • During the last couple of years your income has decreased and your medical and other expenses have increased. So for the last year or so you haven’t been able to pay the minimum amounts on many of your debts as they came due. One collection company has just sued you for $10,000, and others are threatening to do so very soon.

Without Bankruptcy

Summarizing our last blog post, unless you act quickly the collection company would likely get a $10,000 judgment against you. That would likely quickly turn into a $10,000 judgment lien against your home. That creditor may be able to foreclose on that lien, forcing you to pay save your home. At best you’d have to pay off the $10,000 (plus interest) whenever you refinance or sell your home.

Some of your other creditors would very likely also sue and get their own judgment liens against your home.

Chapter 13

You and your bankruptcy lawyer would put together a Chapter 13 payment plan. That plan would be based on the principle that Chapter 13 allows you to keep your home even if its equity is not fully protected by the homestead exemption, as long as you follow certain rules. See Section 1325(a)(4) of the Bankruptcy Code.

Essentially, you must treat creditors in a Chapter 13 case at least as well as they would have been treated in a Chapter 7 case. This applies particularly to the $10,000 tax debt and to the $100,000 in other debts.

So here’s what you would provide for in your Chapter 13 payment plan:

  • Over the course of your plan you would pay off the $15,000 income tax debt. It’s not old enough to “discharge”—legally write off—under either Chapter 7 or 13. But you would not have to pay any ongoing interest or penalties under Chapter 13 (assuming you finished it successfully). And your payments would be flexible, based on what you could afford to pay.
  • You’d pay only as much of the remaining $100,000 as that would have been paid in a Chapter 7 case. Here how that’s calculated, roughly:
    • Determine, hypothetically, how much net sale proceeds would come from your home if a Chapter 7 trustee would sell it. The $275,000 sale price would be reduced by about 6%, or $16,500, for the realtor’s commission. Another $3,500 or so would be spent on title insurance, escrow fees, and any other closing costs. (This assumes no need for any repairs or other sale preparation costs.) The $275,000 sale price minus the $16,500 and $3,500 means a net sale price of $255,000.
    • Subtract the mortgage amount of $185,000 from this $255,000 net sale price results in sale proceeds of $70,000 in this hypothetical sale.
    • Subtracting the $50,000 homestead exemption from this $70,000 leaves $20,000 that you must pay to your unsecured creditors in your Chapter 13 plan.
    • $15,000 of that would go to the income taxes.
    • That leaves only $5,000 ($20,000 minus $15,000) that you need to pay to the remaining $100,000 of debt. In other words, you would have to pay 5% of those debts.
    • Your monthly plan payment would be around $400 per month, for about 60 months. Much of that would go to pay off the taxes, which you’d have to pay after a Chapter 7 case anyway.
    • At the end of your case you would have kept your home in spite of it having $30,000 in equity beyond the $50,000 homestead exemption. The unpaid $95,000 of debts would be discharged.

This is quite a good result. Throughout the Chapter 13 case you and your home would have been protected from the tax collector, the suing collection company, and all your other creditors. Then as of the end of the case you’d have paid off the income taxes, and would be (other than the mortgage) completely 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.

 

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