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Archive for the ‘Home Mortgage’ Category

Resolve Mortgage Accounting Disagreements

October 21st, 2019 at 7:00 am

Chapter 13 gives you valuable power to force your mortgage lender to be up front about how much you owe, and to efficiently dispute the amount. 

 

Catching Up on Your Mortgage over Time

A Chapter 13 case gives you the power to catch up on your home mortgage(s) over an extended period.  This “adjustment of debts” type of bankruptcy can give you up to 5 years to catch up.

This power is found in the U.S. Bankruptcy Code language allowing you to cure “any default within a reasonable time.” Section 1322(b)(5). That amount of time is interpreted to mean, in most circumstances, the length of your Chapter 13 payment plan. Most payment plans are between 3 and 5 years long. If you need more than 3 years, usually you can extend your plan longer, up to 5 years.

The Mortgage Accounting Challenge

If you fall behind on your mortgage it can be ridiculously difficult to get accurate information from your lender about the amount you owe. If you don’t have accurate information, you can’t fulfill your desire and responsibility to cure the arrearage.

This problem is aggravated over the course of the case when the mortgage payment amount changes over time. This could be from normal changes in the interest rate, property tax and insurance, or the addition of fees.

You can’t cure the arrearage or maintain monthly payments if you aren’t timely told the amounts you owe. You can’t efficiently dispute the stated amounts if the lender does not respond in good faith.

This accounting confusion had been a serious problem for millions of homeowners trying to save their homes. In 2011 a new procedure was created within Chapter 13 to efficiently resolve mortgage accounting disputes. It’s contained in Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. It gives you the power to force your lender to work with you to determine how much you owe.

How the Procedure Works

The procedure focuses on changes to the ongoing mortgage payment amount.  You can’t catch up on the arrearage if that arrearage increases because you’re not paying the right monthly payment. 

Your lender “shall file and serve on” you, your bankruptcy lawyer, and your Chapter 13 trustee “any change in the payment amount.” This includes “any change that results from an interest rate or escrow account adjustment.” This notice must be given “no later than 21 days before a payment in the new amount is due.” Rule 3002.1(b) of the Federal Rules of Bankruptcy Procedure.

You or your lawyer can object to the change in the lender’s notice. You must do so before that new payment is due. If you don’t object on time, the lender’s payment change goes into effect.

If you do object, the bankruptcy judge determines whether the lender’s proposed new amount is appropriate or not.

This procedure forces the lender to be up front about changes in how much you owe. It allows you to dispute those changes, and to get a quick court determination about who is right.

 

Bankruptcy May Strip Off a Junior Mortgage

August 12th, 2019 at 7:00 am

Summary

Do you have a second or third mortgage on your home? Imagine if you could stop paying that monthly mortgage payment. Imagine over the course of the next 3 to 5 years paying only as much as you could readily afford to pay on the balance of that mortgage. This is often only a small portion of the mortgage balance. Or, if over that time you could afford to pay nothing, you’d likely pay nothing on that mortgage balance. Then at the end of that time, whatever you couldn’t pay would get completely written off.  That’s what happens in a second or third mortgage strip under Chapter 13 “adjustment of debts.”

Qualifying to Strip Your Second or Third Mortgage

The economic environment that is most likely to result in stripping mortgages is one of declining or static home prices. That’s not currently the situation in most parts of the country. Yet, given the huge potential advantages, it’s still worth looking to see if you qualify.

To qualify, your home can’t be worth more than the value of the liens legally ahead of the mortgage being stripped. You want to strip your second mortgage? Your home’s value can’t be more than the sum of first mortgage’s balance plus any other senior liens. Examples of liens possibly senior to the second mortgage: unpaid property taxes, an income tax lien, a homeowner association assessment.

For example, let’s say a home is worth $200,000 and the first mortgage balance is $197,500. You have a second mortgage of $20,000. But say you are also behind on property taxes totaling $4,000. By law the lien on that property tax usually legally comes ahead of the mortgages. So the liens ahead of the second mortgage—$4,000 plus $197,500—total $202,500. That’s more than the $200,000 that the home is worth. The $20,000 second mortgage could likely be stripped.

How Mortgage Stripping Works

Procedures can vary. There is a place in your Chapter 13 plan where your bankruptcy lawyer indicates you are stripping a mortgage. See question 3.2 in the official Chapter 13 Plan form. In most bankruptcy courts your lawyer will also file a motion to strip the mortgage. He or she may instead need to file a more formal adversary proceeding—a specialized bankruptcy lawsuit. The primary issue in all of these procedures is usually the true value of the home. Other pertinent facts are the accurate balances and legal order of the prior liens.

Once those facts are determined, either by consent or the judge’s ruling based on the evidence, it becomes clear whether the mortgage at issue can be stripped. If it can, the mortgage debt turns from one secured by your home into a completely unsecured debt. That allows you to stop making the mortgage payments on the stripped (second or third) mortgage.

How Much the Stripped Unsecured Mortgage Gets Paid

Once the mortgage balance becomes unsecured, you pay it to the same extent as all your other general unsecured debts. As mentioned above, that is often not very much, and may even be nothing.

How much depends usually on what you can afford to pay on these lowest priority debts. That’s called your disposable income—your net income minus reasonable expenses.

However, often much of your disposable income goes elsewhere, not to your general unsecured debts. Other debts are considered legally more important—such as catching up on a first mortgage, vehicle loan, child or spousal support, or income taxes. These secured or priority debts usually get paid in full before anything goes to the general unsecured debts. If all of your disposable income goes to pay secured and priority debts (plus trustee and attorney fees), then there may be nothing left for the general unsecured debts. If so, you may pay nothing on your stripped mortgage balance.

Why You Usually Don’t Pay Any More on General Unsecured Debts

What if you do have some money left over during your 3-to-5-year plan to pay towards your general unsecured debts? This is important: you likely won’t end up paying any more on these unsecured debts if you strip a mortgage.  That’s because usually you have only a set amount of money available for all the general unsecured debts. Remember, that’s based on what you can afford to pay, minus what goes to higher priority debts and fees. That set amount of money just gets divided up among an additional unsecured debt—your stripped mortgage balance.

Example: You have $50,000 in general unsecured debts. You can afford to pay a total of $5,000 towards those debts during your 3-year plan. That’s a 10% payout. Now you strip a $20,000 second mortgage, so now your total general unsecured debt balance is $70,000. Your other circumstances haven’t changed, so you still can afford to pay $5,000 towards your unsecured debts. That money is just spread out over more debt (resulting in about 7% payout on them).

The result is that in this example you’d pay about 7% on your stripped mortgage, or about $1,400 of the $20,000. More importantly, you wouldn’t pay a dime more to complete your case than if you didn’t have that stripped mortgage. Then at your Chapter 13 case’s completion, the remaining mortgage balance would be wiped clean and the mortgage’s lien wiped off your home’s title.  

 

Chapter 13 Gives the Most Time to Cure Your Mortgage

July 29th, 2019 at 7:00 am

Chapter 7 provides no mechanism to cure your mortgage. But Chapter 13 does provide a powerful, realistic, and practical way to do so. 

 

Chapter 7 “Straight Bankruptcy” and Chapter 13 “Adjustment of Debts”

Chapter 7 and Chapter 13 are the two main consumer bankruptcy options.

Most Chapter 7 cases only takes a few months—usually 3 to 4 months—from filing to completion. A Chapter 13 case usually takes 3 to 5 years. At first this extra length of time may seem like a disadvantage. However Chapter 13 puts this time to good use, accomplishing things that you can’t under Chapter 7.

Essentially, Chapter 13 gives you the 3-to-5-year period to cure your mortgage, while protecting your home throughout that time.

The Chapter 7 Shortcomings

Chapter 7 leaves you at the mercy of your mortgage lender if you’re behind on the mortgage.

Chapter 7 protects you from the lender for only the 4 months or so that it lasts. (The protection might even be shorter if the lender asks the bankruptcy court for permission to end the protection sooner.) During that time you may be able to work out a “forbearance agreement” with your lender. This agreement nails down the terms for curing your mortgage.

The problem is that you have precious little leverage in this negotiation. If you are not too far behind on your mortgage, your lender may be give you a few months, maybe up to a year, to catch up. But the lender has all the leverage and you have almost none. It could just begin or resume a foreclosure as soon as your Chapter 7 case is over. With that leverage it can make you try to catch up unrealistically fast, requiring huge extra catch-up payments each month. This makes more likely that you won’t succeed in always making the required payments. And at best, if you do make those large payments and do catch up, it’ll be a tough and risky experience.

The Chapter 13 Solution

In contrast, as mentioned above Chapter 13 gives you much more time, and protects your home in the meantime.

Instead of the catch-up payment amount being imposed on you, your personal realistic budget determines the amount. The payments can be stretched out over as much as 5 years. You may even be able to delay or lessen these catch-up payments if you have other even more urgent debts to pay. Also, if your circumstances change midstream, you’d likely be able to adjust the payments.

These and other advantages effectively lower the catch-up payments, making more likely that you’ll successfully cure the mortgage and keep your home.

Doing Your Part

You can rather easily lose the multi-year protection of Chapter 13 if you don’t fulfill some important obligations. To maintain the protection you have to:

1. Keep current on your court-approved Chapter 13 payment plan. Your catch-up payments are incorporated into the single monthly payment you make towards virtually all your debts. Not paying this to the Chapter 13 trustee each month gives your mortgage lender cause to ask permission to foreclose. It also gives cause for your case to be thrown out altogether. 

2. Keep current on the regular monthly mortgage payments. Chapter 13 gives you the means to slowly cure your arrearage. Falling further behind in the middle of your case seriously jeopardizes your case.

3. Pay your homeowner’s insurance on time. Don’t let your insurance lapse. That really scares your mortgage lender (and should scare you, too). Your lender would likely “force-place” its own insurance (which protects it but not you). It would then make you pay the exorbitant cost of this insurance, putting you that much further behind. This is also an independent basis for it to ask permission to foreclose.

4. Pay the property taxes. Falling behind on property taxes also gives the mortgage holder a separate basis for asking the bankruptcy court for permission to foreclose. The budget you work out with your bankruptcy lawyer will include money for these taxes, to prevent this from happening.

 

Bankruptcy Helps You Afford Your Mortgage

July 22nd, 2019 at 7:00 am

Bankruptcy frees up cash flow for your mortgage payments. Chapter 7 does so by writing off other debts. Chapter 13 does so more creatively. 


 

Both Chapter 7 and Chapter 13 Improve Your Cash Flow

A Chapter 7 “straight bankruptcy” case would very likely quickly write off (“discharge”) many of your debts. For many people it discharges most of their debts, maybe even all of them except their home mortgage. That frees up cash flow so that you can better afford to pay your mortgage.

A Chapter 13 “adjustment of debts” case is different but has a similar result. It would very likely reduce payments on most or all of your non-mortgage debts. The amount you pay monthly on your debts is often radically reduced. Plus Chapter 13 deals much better with a variety of dangerous debts. The end result is also to free up cash flow so that you can better afford to pay your mortgage.

Let’s take a closer look at these two options.

Chapter 7 Helps You Pay Your Mortgage

Are you current or almost current on your home mortgage, but only because you are not making required payments on some of your other debts? And/or are you not spending what you reasonably should be on expenses such as food, clothing, or doctor/dental visits?

Chapter 7 legally allows you to immediately stop paying most of your debts. This is accomplished through the “automatic stay,” which stops virtually all collection activity against you. (Section 362 of the U.S. Bankruptcy Code.)

Then, under Chapter 7 the bankruptcy court discharges these debts 3 to 4 months after you file your case. (Section 727 of the Bankruptcy Code.)

So if you’ve been struggling to pay your mortgage, Chapter 7 gives you huge relief. You immediately don’t have to pay some or all of other debts that you’ve been paying. So you can better afford to pay your home mortgage.

If you’ve not been paying creditors you should have been, Chapter 7 stops them from coming after you later.  This prevents them from suing you and garnishing your wages, taking away your ability to pay your mortgage later. So you get long-term relief.

Also, you can better afford to pay essential home obligations, like your property taxes and homeowner’s insurance. If you are behind on either of these, Chapter 7 helps with this immediately and long-term.

Chapter 13 Helps You Pay Your Mortgage, Helping Both Less and More

A Chapter 13 case may help your cash flow differently than Chapter 7. Usually you do continue paying something to all your creditors (although not always). However, if you have certain special debts, Chapter 13 helps your cash flow much more than Chapter 7.

Chapter 13 also helps more than Chapter 7 if you are behind on or struggling to pay your mortgage, your homeowner’s insurance, or the property taxes.

Let’s look separately at these two ways Chapter 13 help more than Chapter 7.

Chapter 13 Helps Your Cash Flow More if You Have Certain Kinds of Debts

Chapter 7 does not discharge all debts. Back child and spousal support, other divorce-related debts, recent income taxes, and student loans usually are not discharged. If you owe any of those, you will have to continue paying them. In the case of child/spousal support, the filing a Chapter 7 case does not stop its collection at all. (Section 362(b)(2) of the Bankruptcy Code.) With the other debts, collection against you can resume 3-4  months later when the case is completed. (Section 362(c)(2).)

In contrast, filing a Chapter 13 case does stop the collection of these “nondischargeable” debts. As with Chapter 7, the “automatic stay” protection against collection ends when the Chapter 13 case is finished. But with a successful Chapter 13 case that usually doesn’t happen for 3 to 5 years.

More importantly, Chapter 13 provides a great way for you to pay these special kinds of debts in the meantime. You do so based on a reasonable budget, while being protected from all of your creditors. So when your Chapter 13 payment plan is finished, you have paid off or brought current your nondischargeable debts. You no longer need the “automatic stay” protection.

By forcing these special creditors to accept payments based on your budget, you protect your ability to pay your mortgage. 

Chapter 13 Helps You Catch up on Your Home Mortgage, Insurance, and Taxes

If you are behind on your mortgage payments, Chapter 13 provides one of the best ways possible to catch up. You have 3 to 5 years to catch up. You do have to continue/resume making your ongoing monthly mortgage payments. The arrearage catch-up payments are incorporated into your single monthly Chapter 13 plan payment. As mentioned above, that plan payment amount is based on your reasonable budget. Other more urgent obligations (such as catching up on child support or maybe a vehicle payment) can sometimes go ahead of catching up on your mortgage for a while. So Chapter 13 can be quite flexible.

If you are behind on homeowner’s insurance, that’s a serious problem. That alone is grounds for foreclosure of your mortgage. The lender will very likely impose its own very expensive “force-placed” insurance, wasting a lot of your money. This often aggravates your already difficult situation. Chapter 13 eases your cash flow so that you can afford to pay your insurance. To the extent force-placed insurance is already in the arrearage amount you owe, Chapter 13 provides a reasonable way to pay it.

If you’re behind on your home’s property taxes, that also is a separate ground for foreclosure. Whether the taxes are part of your mortgage payment or you pay it separately, Chapter 13 can solve this problem. As with homeowner’s insurance, if your lender already paid the taxes, you catch up on that along with the mortgage arrearage. If you pay taxes separately, you catch up with the taxing authority directly, as part of your 3-to-5 year payment plan. Both your mortgage lender and the taxing authority have to cooperate, as long as you fulfill your Chapter 13 obligations. 

Conclusion

Chapter 7 helps very directly, by discharging other debt so that you can better afford to pay your mortgage. Chapter 13 helps by providing a better way to deal with especially dangerous debts that Chapter 7 doesn’t handle well.

 

More Bankruptcy Benefits for Your Home

June 24th, 2019 at 7:00 am

Besides helping with your mortgage, bankruptcy protects your home against other liens—from judgments, income taxes, and homeowner associations.  


Last week we gave you 7 ways that bankruptcy can either save your home now or protect it going forward. Here are the remaining 8 ways (#8 through #15), mostly involving involuntary liens placed on your home by special creditors.

8. Judgment lien “avoidance”:  

You can get rid of a present judgment lien that’s on your home’s title if it “impairs” your homestead exemption. This means that it “eats into” the equity that is protected by the exemption. Judgment lien avoidance turns a secured debt that you’d have to pay to protect your home into an unsecured one. See Section 522(f)(A) of the U.S. Bankruptcy Code.  You could then usually write off (“discharge”) that unsecured debt in a Chapter 7 “straight bankruptcy” case. Or you could pay little or nothing on that debt in a Chapter 13 “adjustment of debts.”  

9. Prevent future judgment liens:  

Bankruptcy stops ongoing or future lawsuits against you. See the “automatic stay” of Section 362(a)(1) and(6) of the Bankruptcy Code. First, ongoing lawsuits are usually frozen in their tracks so they can never turn into judgments. Second, any creditors which have not sued you beforehand usually can’t ever do so (with some rare exceptions). So they can’t get a judgment, and can’t ever record a judgment lien on your home. Since not all judgment liens can necessarily get “avoided” under #8 above, it can be very important to file bankruptcy with your bankruptcy lawyer before a creditor gets a judgment.

10. Prevent upcoming income tax liens by discharging the tax debt: 

Similarly, in many situations bankruptcy prevents the IRS or your state from recording an income tax lien against your home. Section 362(a)(4 and 5). Under either Chapter 7 or 13 you can discharge older and otherwise qualifying tax debts. During the bankruptcy case the IRS/state can’t record a tax lien. And it can’t do so afterwards because the tax debt no longer exists. So, your bankruptcy filing prevented the tax from being secured against your home, which would’ve created serious disadvantages for you. As a result it’s highly preferable to file bankruptcy before a tax lien gets recorded.

11. Prevent upcoming income tax liens by paying off the tax debt:  

If the tax debt is newer or otherwise doesn’t qualify for discharge, pay the tax through Chapter 13 filed through your bankruptcy lawyer. Section 1322(a)(2). You pay the tax based on your realistic budget instead of the IRS/state’s imposed one. You can delay paying on the tax while you pay more important debts (such as to catch up on your mortgage). You don’t pay ongoing interest and penalties (since the debt is unsecured). Again, during the case the IRS/state can’t record a tax lien. And it can’t afterwards because by then you’ll have paid off the tax. You’d have prevented IRS/state from gaining the significant advantage against you of a recorded tax lien.

12. Prevent or address a child/spousal support lien against your home:  

Discharge your other debts with a Chapter 7 or 13 case so that you don’t fall behind on support payments. Or if you’re already behind, catch up on your support obligations with a Chapter 13 payment plan. As long as you pay as you’ve agreed, no new support lien can be imposed on your home. And your ex-spouse or support enforcement agency can’t foreclose on any pre-existing support lien. Your home is protected while you catch up.

13. Protect your home from your homeowners’ association:

If you’re get behind on homeowner association dues and/or assessments, your HOA gains tremendous power over you. You can regain the upper hand by filing a Chapter 13 case. You have to pay the back dues or assessment(s) if you want to keep your home. But you have as much as 5 years to catch up through a Chapter 13 payment plan. Throughout that time the HOA can’t foreclose or take other collection action, as long as you’re paying your plan.

14. Buy time to sell your home:

In many different situations, bankruptcy gives you more time to sell a home. You may need more time to get it ready for sale, or may want to move later for personal reasons. Chapter 7 usually delays a mortgage foreclosure, or similar actions against your home by other lienholders, for a few weeks or months through Chapter 7. You can likely get much more time to sell, sometimes as long as 5 years, through Chapter 13.

15. Resolve accounting disputes with your mortgage lender:

If you fall behind on your mortgage, it can be shockingly difficult to get on the same page with your lender about how much you owe. This is especially true if you have a history of being behind over an extended period. This accounting confusion has been a serious problem for millions of homeowners over the last decade or two. So, in 2011 a new procedure was created (mostly for Chapter 13) to efficiently resolve such disputes. See Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. It’s a very handy tool when you’re trying to save your home and your lender is not cooperating.

 

Your Home Mortgage in Chapter 7 and Chapter 13

November 27th, 2017 at 8:00 am

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

 

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

Chapter 7

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

Chapter 13

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

 

Buy Much More Time for Your Home with Chapter 13

October 18th, 2017 at 7:00 am

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

 

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

The Limits of Help from Chapter 7 “Straight Bankruptcy”

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

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

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

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

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

When You Need Chapter 13 “Adjustment of Debts”

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

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

Stretching Out Mortgage Catch-up Payments

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

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

Flexibility in Catching Up

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

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

Conclusion

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

 

Catching up on Property Taxes When You Have a Mortgage

August 11th, 2017 at 7:00 am

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

The Problem

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

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

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

When Chapter 7 “Straight Bankruptcy” Solves This Problem

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

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

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

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

With Chapter 13 You Buy Lots of Time

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

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

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

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

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

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

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

At the End of the Case

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

 

A Second Mortgage “Strip” through Chapter 13

July 8th, 2016 at 7:00 am

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

 

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

2. Stripping Second or Third Mortgage

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

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

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

An Example

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

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

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

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

“Stripping” Your Second Mortgage

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

The Great Benefits

A number of very good consequences would flow from this.

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

 

Keeping Your Home through Chapter 13

May 16th, 2016 at 7:00 am

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

 

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

Protection through the “Automatic Stay”

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

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

Buying Some Time with Chapter 7

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

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

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

Buying a Lot More Time with Chapter 13

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

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

Not Need Lender’s Consent

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

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

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

Creative Flexibility

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

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

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

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

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

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

The Flexibility to Safely Change Your Mind

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

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

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

 

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