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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 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.

 

Protect Equity in Your Home Not Covered by the Homestead Exemption

July 29th, 2016 at 7:00 am

If your home is at risk because you have more equity than the amount of the homestead exemption, Chapter 7 might still save your home.  

 

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. Next time we’ll finish this off with the last of those 10 ways. But today we take a detour. We show how filing a Chapter 13 case, lasting 3 to 5 years, might not be necessary to save your home and its equity even if the amount of that equity is larger than what is protected by your homestead exemption. Chapter 7 may be enough.

Here’s how we introduced the Chapter 7 part of this earlier.

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 the home to pay the unprotected portion of the proceeds to your creditors. But you may still be able to keep your home.

First, you might be able to claim exemptions in addition to the homestead exemption. Second, you may be able to convince the trustee to accept a deal to let you keep the home.

Here’s how this works in practice.

The Example

Assume the following facts:

  • You own a home that is worth $250,000.
  • Your mortgage loan on that home is $180,000, so you have equity of $70,000.
  • 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 assume it is this amount for this example.)
  • You owe $75,000 in credit cards and personal loans, plus $20,000 in medical bills, totaling $95,000.
  • 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 $7,500, and others are threatening to do so very soon.

Without Bankruptcy

Unless you have some defense to the $7,500 lawsuit, the collection company will likely get a judgment against you within a few weeks. In most states that would quickly turn into a judgment lien against your home.

That creditor may be able to foreclose on the judgment lien, forcing you to pay to not lose your home. The judgment lien encumbers your title, reducing the equity you have in the home. The underlying judgment debt continues earning interest. At best it would have to be paid off whenever you refinance or sell your home.

Your other creditors would also be motivated to sue you. That’s because even after the $7,500 judgment lien, you still have more home equity that could be attached. You and your home are sliding downhill fast.

Chapter 7

Assuming you want to keep you home and the equity you have in it, Chapter 7 provides some help. Under the right circumstances that help may be enough.

If you and your bankruptcy lawyer file it fast enough, the collection company would not get a judgment. So, no judgment lien on your home. These are good things.

And most likely that $7,500 debt would be legally written off, and usually only 3-4 months after the bankruptcy filing. Furthermore, most likely all of the $95,000 in credit card, medical, and other debts would be written off. Another good thing.

So what’s the problem? The problem is that Chapter 7 is a “liquidation.”

In most Chapter 7 cases nothing the debtor owns gets “liquidated”—taken, sold, and the proceeds paid to creditors. Nothing is taken because in most Chapter 7 cases everything that the debtor owns is “exempt.” That means it’s protected both from your creditors and from the bankruptcy trustee, who works on behalf of the creditors.

But under our facts your home is not fully exempt. The homestead exemption protects only $50,000 of the $70,000 of equity. The Chapter 7 trustee could take and sell the home, pay you your $50,000 homestead exemption, and divide the remaining proceeds of the sale among your creditors. How could you avoid this, keep your home, and write off all your debts? How could you do this without being in a Chapter 13 case for 3 to 5 years?

1) Possibly Apply Other Exemptions

In some states and under some circumstances, you may have other exemptions that you could apply to your home on top of the homestead exemption. Some states provide a relatively large floating exemption that you can add to the homestead exemptions. That may eat up enough of the remaining equity that the trustee is persuaded it’s not worth taking and selling the home.

2) Negotiate with the Chapter 7 Trustee

The trustee is not particularly interested in taking your house. He or she just wants to pay your creditors what the law provides. Under the right circumstances, deals can be struck with the trustee.

In our example, let’s assume that the trustee would agree that the home’s fair selling price would be $250,000. But after paying the mortgage lender $180,000 and $50,000 to you, the trustee wouldn’t actually have $20,000 to distribute to your creditors. There would be selling costs that would cut into that. The realtor’s commission at about 6% is $15,000. Other selling and closing costs would likely eat up all or most of the remaining $5,000.

At this point the trustee may simply agree that selling the home “would not result in a meaningful distribution to the creditors.” That is, there’s a good chance that after much effort there would be little or nothing for the creditors.

Or the trustee may push to get something out of you in return for not selling the home. The trustee may argue, and even get a realtor’s estimate, that the home could sell for $255,000 or $260,000. So the trustee may agree to let you keep the home if you agreed to pay $5,000 or $10,000. You would likely get a year or so to pay it. If you could afford the monthly payments, or had a source for that kind of money, that may be better than a much longer lasting Chapter 13 case.

 

For the sake of comparison, and in case the Chapter 7 option would simply not work, see our next blog post for how a Chapter 13 could solve this problem better.

 

Flexibility in Selling Your Home through Chapter 13

July 11th, 2016 at 7:00 am

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

 

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

3. Much Greater Flexibility in Selling Home

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

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

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

The Example

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

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

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

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

Chapter 7 Won’t Likely Solve the Problem

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

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

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

Chapter 13 Buys You Time to Sell Your Home

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

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

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

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

Conclusion

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

 

Ten Ways to Keep Your Home through Chapter 13

July 1st, 2016 at 7:00 am

These 10 tools, especially used in combination, can defeat your mortgage debt and other home-based challenges.

   

A few blog posts ago we said that while Chapter 7 “straight bankruptcy” strengthens your hand with your secured debts, Chapter 13 can be much stronger. One way that Chapter 13 is stronger is in enabling you to keep things you own which have a secured creditor’s lien on them. Indeed, that’s probably the most common reason for filing a Chapter 13 case—to keep your home, vehicle, and/or other possessions at risk of repossession.

Because Chapter 13 can help you in so many ways keep assets with liens on them, we’ll focus today on just one of those assets, your home. Here are 10 ways that this tool helps you stay in your home.

1. More Time to Catch up on Unpaid Mortgage Payments

Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up. Chapter 13 often gives you years, which greatly reduces how much you have to pay each month to eventually get current. If you are many thousands of dollars behind on your mortgage(s) having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.

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. Chapter 13 gives you the possibility of “stripping” a second or third mortgage lien off your home title, potentially saving you hundreds of dollars monthly, and thousands or even tens of thousands of dollars in the long run. To do so the home value must be no more than the total of the liens legally superior to, or ahead on the title to, the junior mortgage you want to “strip.” In other words, there can be no home equity being encumbered by the mortgage at issue because that equity is fully absorbed by the other earlier liens. “Stripping” a mortgage can save you many hundreds of dollars every month and many thousands of dollars during the life of your home ownership.

3. Much Greater Flexibility in Selling Home

Chapter 7 gives you at most only about three or four months while your mortgage holder can’t foreclose and your other creditors can’t take action against you or your home. In contrast, under Chapter 13 you could potentially be protected for years. You may need to move and sell your home, but not until you are ready to do so. You may need to wait until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, so that you can live in your home in the meantime.

4. Get Current on Past Due Property Taxes

Filing a Chapter 7 case doesn’t protect you from property tax foreclosure—beyond the three, four months that the case lasts. Chapter 13 protects you and your home while you gradually catch up on those taxes, in a court-approved plan that also incorporates your mortgage(s) and all other debts.

5. Protection from Both Previously Recorded and Future Income Tax Liens

Chapter 7 usually does nothing to address tax liens that have already been recorded on the home, or to stop future tax liens on income taxes that you continue to owe after the bankruptcy case is completed. In contrast Chapter 13 provides an efficient and effective procedure for valuing, paying off, and getting the release of tax liens. And the IRS/state cannot record a tax lien on income taxes while the Chapter 13 case is active.

6. The Chapter 13 “Super-Discharge”

You can “discharge” (permanently write off) in a Chapter 13 case obligations arising out of a divorce decree dealing with the division of property and the division of debt (but NOT the provisions about child/spousal support). You cannot discharge these non-support divorce debts under Chapter 7.

So if you owe a significant amount of this kind of debt, and there isn’t already a lien on your home securing it, Chapter 13 could stop a lien from being imposed. The debt would be discharged at the end of your Chapter 13 case as a “general unsecured” debt.

7. Debts Which Cannot Be Discharged Such as Income Taxes & Back Child/Spousal Support

If you owe any of those special debts which cannot be discharged in bankruptcy, as soon as you finish a Chapter 7 case (usually only about three or four months after you start it) the creditors on those debts can start collecting on them from you. Those particular creditors—such as the IRS, the state taxing authority, the state or local support enforcement agencies, and your ex-spouse—often have extraordinary collection powers. They can put a tax lien or support lien on your home, and under some circumstances can even seize and sell your home to pay those liens.

In great contrast, a Chapter 13 case protects you while you pay off those special debts in a payment plan that you propose and is reviewed and approved by the bankruptcy judge assigned to your case. During the 3-to-5-year plan, all of your creditors—including the ones just mentioned above—are prevented from putting liens on your home. By the completion of your Chapter 13 case those special debts are paid in full or paid current, so that they can’t threaten you or your home any more.

8. “Statutory Liens”: Utility, Contractors, Municipal/Local and Other Involuntary Liens

If you had an involuntary liens imposed by law against your home before you file bankruptcy, those liens would very likely survive a Chapter 7 bankruptcy.

These are called “statutory liens” because they are set up through state statutes, or laws. Examples include a utility lien is for an unpaid utility bill, a contractor’s lien (sometimes called a “mechanic’s” or “materialman’s” lien) is for an unpaid, and usually disputed, home remodeling or repair debt, and local government liens for unpaid fees against your property.

These liens against your home generally survive a Chapter 7 case, and so these creditors would be able either to threaten foreclosure of your home to force payment, or at least would force payment whenever you’d sell or refinance your home. Under Chapter 13, in contrast, the protection for your home would generally continue throughout the three-to-five year case, keeping it safe while you satisfy the lien.

9. Judgment Lien “Avoidance”

A judgment lien is one that is placed on your home after someone (usually a creditor) sues you, gets a judgment against you, and records that judgment in the county where your home is located (or uses whatever the appropriate procedure is in your state).

In bankruptcy a judgment lien can be removed from your home under certain circumstances. Although judgment lien avoidances are available under Chapter 7 as well as Chapter 13, it can often be put to better use in Chapter 13 when used in combination with advantages available only under Chapter 13.

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

If you have too much equity in your home—value beyond the homestead exemption’s protection—in a Chapter 7 case you run the risk of a Chapter 7 trustee seizing it to sell and pay the unprotected portion of the proceeds to your creditors. Under Chapter 13, in contrast, you can keep and protect the home by paying those creditors gradually over the course of the up-to-five-year Chapter 13 case.

 

The Homestead Exemption Cap

March 4th, 2016 at 8:00 am

Bankruptcy law sets a maximum dollar amount of protection for your recently-bought home, but this really applies only to certain states.

 

Our last blog post a couple days ago was about protecting retirement funds in bankruptcy. Today’s is about protecting your home, specifically if you bought your home within the last few years.  

Property Exemption Laws

When you file a bankruptcy case, your assets are protected through a set of legal exemptions–a list of categories of assets usually with maximum dollar limits, which you can keep out of the reach of your creditors.

Each state has adopted a set of property exemptions. Federal bankruptcy law also contains its own set of exemptions. When filing bankruptcy in ANY state you may use the state exemptions, plus in some states you also have the option of using the federal set of exemptions instead. This blog post applies only if you are using your state’s exemptions, and in particular applies to your state’s homestead exemption.

The Homestead Exemption

Almost every state has a homestead exemption, protecting their residents’ homes and/or home equity. The homestead exemptions vary widely state to state in how much home value or equity they protect.

At the low end, the Kentucky and Tennessee homestead exemptions protect only $5,000 in value or equity for an individual homeowner.

At the opposite end, the Montana exemption is $250,000, Minnesota’s is $390,000, Rhode Island’s and Massachusetts’s are $500,000, and Nevada’s is $550,000.

Also, the following states have homestead exemptions with no dollar limit (although some have acreage or other limitations): Texas, Oklahoma, Arkansas (if married or head of household), Kansas, Iowa, South Dakota, and Florida.

The Federal Cap on the State Homestead Exemption

As we said at the beginning, under certain circumstances federal bankruptcy law caps the dollar amount of state homestead exemption if you bought the home recently.

The purpose of this cap is to prevent people from moving from a small homestead exemption state and buying a home in a state with a very large or unlimited state homestead exemption in order to shield their assets from their creditors. It also may prevent some long-time residents of these same large exemption states from converting other assets into expensive homes, again shielding those assets from their creditors leading up to filing bankruptcy.

This federal cap on homestead exemptions is $155,675 (increasing to $160,375 on April 1, 2016).

Applicable to High and Unlimited Homestead Exemption States

The relatively large dollar amount of this cap makes it irrelevant to the residents of many states.

This cap will only affect you if your state’s homestead exemption is larger than this cap. That’s true only for the 12 states mentioned above which have either large homestead exemptions (Montana, Minnesota, Rhode Island, Massachusetts and Nevada) or unlimited homestead exemptions (Texas, Oklahoma, Arkansas, Kansas, Iowa, South Dakota, and Florida).

Only Applicable to Relatively Recent Home Purchases

This homestead exemption cap doesn’t kick in unless you bought the home at issue within the 3-years-and-4-months period before filing bankruptcy (within 1,215 days before, to be precise).

And even if you did, the cap doesn’t apply if the equity in the home you bought came from the sale proceeds of another “principal residence” within the same state, which had been purchased before that 3-years-and-4-month period.

The point of these conditions is to cap the large homestead exemptions only for relatively short term residents, or those sinking other money into expensive homes. It’s not designed to prevent those who bought their home more than 1,215 days earlier from using the full state homestead exemption. And it’s not designed for those who bought within that time period but did so by using equity from a prior home bought in that same state before that time period.

 

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