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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.


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.  


Assets Recently Sold or Given Away

December 2nd, 2016 at 8:00 am

Your assets can include property and possessions that you have sold or given away before filing bankruptcy.


Your Assets in Bankruptcy

In our last blog posts we got into two special kinds of assets: inheritances and assets you own with someone else. There are special rules and considerations with these unusual assets.

Today’s blog post is about something that may seem even more unusual—assets you used to own but now don’t.

For most purposes the bankruptcy system looks at your financial life now, not in the past. Chapter 7 “straight bankruptcy” picks the date of filing as the point in time to focus on. So does Chapter 13 “adjustment of debts”, while also looking at your financial life during the 3-to-5-year period it lasts.

But bankruptcy can also look backwards at assets you owned before filing the case, in very limited circumstances. Today we look at so-called “fraudulent transfers.” Spoiler alert—your actions don’t necessarily need to be fraudulent to make a “fraudulent transfer.”

The Point of “Fraudulent Transfers”

If you sell or give away some of your assets during the two years before filing bankruptcy, what you sold or gave away can sometimes be brought back into your bankruptcy case.

What’s the point of this ability to reach backwards in time?

One of the key principles of bankruptcy involves the fair distribution of a debtor’s assets to the creditors. In other words, in bankruptcy creditors are entitled to receive payment (usually only partial payment) through the collection and sale a debtor’s assets, to the extent the law allows.

But this principle applies in a practical way only when you have assets that the law allows to be distributed among your creditors. In most consumer Chapter 7 cases, there is no such distribution to creditors. That’s because all of the debtor’s assets are “exempt,” protected for the debtor’s benefit from the creditors. There is no taking of any of your assets for distribution among your creditors.

But the principle of fair treatment of creditors remains. Here’s how it comes into play with “fraudulent transfers.”

The bankruptcy court sometimes has jurisdiction not only over assets that you own when the case is filed, but also over assets you previously sold or gave away under certain circumstances.  The purpose of this is very practical. It’s intended to discourage debtors from unfairly disposing of assets before filing bankruptcy. It’s to discourage debtors from, in effect, hiding assets from creditors. And if a debtor does dispose of assets, the purpose of “fraudulent transfer” law is to bring back those assets for the benefit of the creditors. Again, this bringing back of sold or given away assets happens only under certain limited circumstances.

Sorry to keep you in suspense but in our next blog post on Monday morning we’ll tell you about those certain limited circumstances.


Chapter 13 Benefits for Real Estate that Is Income-Producing and Equity-Creating

June 20th, 2016 at 7:00 am

Chapter 13 can be an effective way to temporarily or permanently hold on to business and investment real estate equity and income.

If you own real estate that is not your home, filing a Chapter 7 “straight bankruptcy” would likely result in you losing control of what happens to that real estate. In our last blog post we showed how filing a Chapter 13 “adjustment of debts” case could give you more control over that. Often you have more control over whether the property is sold or retained, whether undesirable real estate can be surrendered to its mortgage holder, and the timing of such events.

Chapter 13 also can also much better protect equity in your real estate from your creditors. If that real estate is producing income for you, Chapter 13 can often protect that income and put it to much better use. Furthermore, because Chapter 13 is much more flexible than Chapter 7, and its protection against your creditors lasts for years instead of just a few months, it can give you the opportunity to build equity in your real estate.

More Benefits to the Real Estate within Chapter 13
—Protecting the Equity

If your real estate clearly does have equity, in a Chapter 7 case you would definitely lose the real estate to the bankruptcy trustee and its sale proceeds to your creditors. After all, Chapter 7 is a liquidation form of bankruptcy, and anything that is not protected through property “exemptions” is usually taken by the trustee and sold to pay your creditors.

Usually real estate that is not your home is not protected by an exemption (although there are possible exceptions in certain states under certain circumstances). So again you’d likely lose such property in a Chapter 7 case.

But what if you needed the real estate for your business? Or what if you had some deep personal or family connection to the real estate?

Chapter 13 allows you to keep non-exempt property under many circumstances. You may well have to pay more or longer into your payment plan to pull this off. But in some situations that may not even be necessary.

Determining whether you can keep real estate that is not exempt, and what you would have to do in a Chapter 13 case to pull that off, requires a rather complicated case by case analysis. So you need to talk about this with an experienced bankruptcy lawyer. The point here is that being able to keep otherwise unprotected real estate is much more likely under Chapter 13 than Chapter 7.

—Protecting Real Estate Income

The minute you file a Chapter 7 case the bankruptcy trustee has a right to all rents and other income from your real estate. This is true even if the trustee later decides to abandon that real estate.

In contrast, under Chapter 13 income from real estate is treated much more like your income from employment. Your income from all sources is used to determine your monthly “disposable income”—your income after expenses—and the amount you can afford to pay into your monthly Chapter 13 payment plan.

There are other considerations—such as whether you can financially justify keeping that real estate going forward. But again it’s much more likely that you would be able to keep, or put to good use, income from such real estate under Chapter 13 than under Chapter 7.

—Creating Real Estate Equity under Chapter 13

One of the ways you can justify keeping real estate in a Chapter 13 case—either permanently or to sell later in the case—is to show that you are building equity in the real estate during the course of the case. You can create equity three ways:

1. The real estate may have liens on it—for property taxes, income taxes, or child support, for example—on debts that you would be paying off during the course of the case. Paying off those debts would result in the release of the liens, building equity in the real estate relatively quickly.

2. Some liens—such as for older income taxes—many not have to paid in full or sometimes even in part. The underlying debt may be discharged—legally written off—resulting in the release of such liens, and resulting in the building of equity in the real estate.

3. If the real estate’s value is rising year over year, over the span of a 3 to 5 year Chapter 13 case equity will be created through that appreciation, along with the reduction in the mortgage’s principal balance during that time.

In a Chapter 7 case, as a liquidation form of bankruptcy that fixates on you and your real estate’s status as of the moment your case is filed, future equity is essentially irrelevant. Chapter 13 can open up opportunities to build such future equity to your benefit. 


Chapter 13 Benefits Directly Related to Real Estate Other than Your Home

June 17th, 2016 at 7:00 am

Chapter 13 can be an effective way to keep or unload business and investment real estate.


Our last blog was about selling real estate that is not your home within a Chapter 13 “adjustment of debts” case. We showed how this would give you more control over the timing and other important circumstances of the sale than if you just surrendered the real estate through a Chapter 7 “straight bankruptcy.”

But Chapter 13 may provide other benefits to consider.

Some of those benefits are related to the real estate itself. We’ll cover those today and in our next blog post.

Benefits under Chapter 13 Related to the Real Estate
—Control over Keeping or Selling

When you file a Chapter 7 case you hand over total discretion about that decision to the bankruptcy trustee. He or she chooses whether to take possession and control over the property, whether to sell it, and all the circumstances of that sale. The guiding principle for the trustee’s decision is whether your creditors will benefit, with essentially no consideration for your interests.  

Under Chapter 13 you have at least some say about what to do with the real estate. For example, if you believe that with some “sweat equity”—repairs done through your efforts plus a modest amount of money—you could increase the equity in the property and thereby pay more than you would otherwise to your most important creditors, you’d have to opportunity to make your case about this.

You do have to justify what you propose to do with the real estate, and so your discretion is definitely limited. For example, if want to keep your real estate but it has no equity, requires monthly payments on a mortgage, and produces no financial benefit, you’re going to have a tough time justifying keeping that real estate. Keeping the real estate has to be part of a sensible financial plan.

—Surrendering Undesirable Property

This loss of decision-making includes your likely inability to get rid of real estate that you want to be rid of. It’s not unusual to have real estate that is a significant burden to you. For example, you may very much want to get out from under a rental home where the last tenants manufactured “meth,” with the result that the clean-up costs are prohibitively expensive. Your mortgage holder is not foreclosing, so you file a Chapter 7 case thinking that the bankruptcy trustee gets the property out of your hands. Not necessarily.

The Chapter 7 case may well discharge (legally write off) your mortgage debt, along with all or most of your other debts. But the Chapter 7 trustee would very likely choose to “abandon” the real estate back to you on the grounds that it is “burdensome” or “of inconsequential value and benefit” to your creditors. See Section 554(a) of the Bankruptcy Code.

So you’d still be saddled with the real estate after your Chapter 7 would be over, probably continuing to incur new debts for property taxes, potentially for homeowner association dues and assessments, city fines, and such.

Under Chapter 13 you may be able to be more proactive with such property. You may be in a stronger negotiating posture with the mortgage lender to induce it to accept its losses and foreclose on the property. The bankruptcy court may help with this since that one creditor is potentially harming your ability to pay the other creditors. At the very least you would have the power to convert the Chapter 13 case into a Chapter 7 one once the foreclosure occurred, allowing you to discharge the debts on the property that accrued in the meantime.


(Our next blog post in a couple days will have more about how Chapter 13 can help you temporarily or permanently retain and build your equity in business and investment real estate, and your income from it.)


Selling Real Estate Other than Your Home under Chapter 13

June 15th, 2016 at 7:00 am

Chapter 13 is often a better way to sell real estate, especially if you have other financial complications.


Our last blog was about letting go of real estate that is not your home through a Chapter 7 “straight bankruptcy.” We showed how you can escape debts related to the property. We also showed how you could possibly even have your “priority” debts paid by the Chapter 7 trustee out of any proceeds of the sale of that property.

But Chapter 7 provides limited help. It’s appropriate for certain scenarios, generally more straightforward ones. If you own real estate other than your home, there is a good chance that you have complications that would be better handled through a Chapter 13 “adjustment of debts.”

Chapter 13 Better If…

What kinds of complications would make Chapter 13 the better option?

  • if the real estate has equity and you want some control over the its sale and its timing
  • if the real estate has equity and you want some control over who gets paid out of the proceeds of sale
  • regardless whether the real estate has any equity, Chapter 13 gives you important benefits, some related to the real estate and some unrelated

Control Over Real Estate Sale and Its Timing

In a Chapter 7 case if you have any asset that is not “exempt”—protected from creditors—the bankruptcy trustee takes control over the asset. In the case of real estate with equity, the trustee would decide whether your creditors would benefit from its sale. If the trustee decides to sell it, he or she hires a realtor (usually) and goes through the sale process. You would not have any say in that process, other than to respond to the trustee’s requests for information and cooperate with the trustee’s sale. You would generally have little or no say in when the property is sold, how much it is sold for—beyond very broad standards of reasonableness—or to whom it is sold.

A Chapter 13 case gives you much more control over the sale.

Through a formal Chapter 13 plan put together with the help of your attorney, you propose what you want to do with the real estate, when you want to sell it, for how much, and who will be paid from the proceeds.

There ARE a bunch of rules the plan has to follow. Creditors and the Chapter 13 trustee get a say in the process. The bankruptcy judge has to approve the plan, and resolves any disputes about it. But you have much more say about what happens under Chapter 13 than under Chapter 7.

For example, you would likely be able to hire a realtor of your choosing, and decide whether to put some energy and maybe some money into getting the property ready for sale. Depending on the circumstances you may be able to delay marketing the real estate if the property is increasing in value. You may even be able to sell the property to someone you prefer as long as the transaction is otherwise fair. Overall, you are in control of the sale—albeit under the oversight of the Chapter 13 trustee and the bankruptcy court.

Control Over Who Gets Paid from Real Estate Sale Proceeds

In a sale of your real estate within a Chapter 13 case, valid liens against that real estate would of course have to be paid through escrow as usual. Then if you are entitled to any exemption on the real estate (an amount shielded from your creditors) you would be paid that amount out of the remaining sale proceeds.

But because Chapter 13 is an ongoing process involving your income and expenses, you may not be able to keep that exempt amount. You are generally required to pay “into the plan” all your “disposable income” (generally all income beyond your necessary business and personal expenses). But that may be negotiable. For example, if you need to replace your vehicle, or if it or your home urgently needs some maintenance or repair, some or all of the real estate sale proceeds could go towards such necessary expense(s).

If there are any remaining proceeds after that, there are rules in Chapter 13 about which debts are paid ahead of others out of those proceeds. But within those rules there is some flexibility. For example, certain secured and “priority” debts must be paid in full by the end of the 3-to-5-year payment plan, but you may have some flexibility about which ones are paid faster.

An example can show how this could be of significant practical benefit. 

Early in your Chapter 13 plan you may want to earmark money towards a debt that is particularly important to you, say a child support arrearage in order to bring some peace between you and your ex-spouse. Or you may want to start by catching up on property taxes on your home to avoid the high interest rate and to calm down your anxious mortgage lender. Then you could earmark other important but less urgent debts to be paid somewhat later from the subsequent sale proceeds of the (non-home) real estate. For example, you could hold off paying “priority” income taxes until the sale of the real estate. That because those taxes have to be paid by the end of the Chapter 13 case but incur no interest and penalties in the meantime. And the IRS and state tax agency can’t pressure you during the case. 

Chapter 13 Benefits Related and Benefits Unrelated to the Real Estate

Beyond the question of maintaining greater control over the real estate sale process, timing, and payout, Chapter 13 may provide you many other benefits over Chapter 7. Depending on your circumstances, those benefits may tie in with the real estate itself or may be unrelated to it. We’ll tell you about both sets of benefits in our next blog post.


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