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Bankruptcy Helps Delay Your Home Sale

October 7th, 2019 at 7:00 am

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


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

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

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

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

Chapter 7 Advantage—It’s Quick

Chapter 7 “straight bankruptcy” is quick.

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

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

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

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

Chapter 7 Advantage—It Focuses on the Present

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

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

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

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

Buying Time to Sell Your Home

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

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

Buying Time When Current on Your Mortgage

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

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

Buying Time When Behind on Your Mortgage

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

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

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

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

 

Protection from Your Homeowners’ Association

September 30th, 2019 at 7:00 am

Bankruptcy gives you protection from your homeowners’ association. Chapter 7 may be enough, but Chapter 13 buys much more time.

 

Filing bankruptcy gives you limited, but potentially very useful protection from your homeowners’ association liens and debts. A Chapter 13 “adjustment of debts” filing could especially help.

Your Homeowners’ Association Is a Particularly Dangerous Creditor

Once you fall behind on homeowners’ dues and or assessments, your association gains tremendous power over you and your home.

Unpaid obligations to your homeowner’s association (HOA) immediately create a lien against your home for the amount of the debt. As soon as the debt increases—every month, usually—the lien increases. This is true whether or not you are in bankruptcy. Assuming you want to keep the home, you will have to pay the debt one way or the other.

Also, about 20 states’ laws give HOA liens “super-priority” status over other liens that are attached to the property. This would include priority over even your first mortgage, which could create huge problems for you. As just one example, if your HOA forecloses on its lien that would eliminate the first mortgage lien. At least potentially, none of the value of the home would go towards paying down the mortgage debt. You could owe the full balance of that mortgage debt in spite of no longer owing the property!

Also, you cannot discharge (legally write off) the debt for any HOA dues and assessments that come due after you file bankruptcy. This is true “for as long as [your or your bankruptcy trustee] has a legal, equitable, or possessory ownership interest” in the home. Subsection 523(a)(16) of the U.S. Bankruptcy Code. This means that if you surrender the home and walk away from it but neither the HOA nor your mortgage holder foreclose your interest in the property for a while, you continue to be on the hook for the monthly accruing due, plus any new assessments, and likely other HOA costs like foreclosure and attorney fees.

As we said, your HOAs can be a dangerous creditor. You need all the protection you can get.

What Chapter 7 Can Do For You

Assume you want to keep your home and are not terribly far behind on the HOA dues and/or assessments. Filing a Chapter 7 “straight bankruptcy” case may give you the limited help you need.

In most Chapter 7 cases all or most of your unsecured debts (those without any liens) get permanently discharged. This should significantly help your cash flow. Most of those debts you don’t have to pay as of the day you file your Chapter 7 case. Talk with your bankruptcy lawyer about whether you would have the cash flow to catch up on and maintain your HOA payments once you file bankruptcy. Your lawyer may want to contact the HOA to work out a payment plan in advance.

Remember, once you decide to keep the home you need to be confident that you can afford to do so. That’s because, as explained above, your Chapter 7 case will not discharge any HOA obligations that come due after filing. The last thing you want is new HOA debts accruing on a home you aren’t keeping after all. Decide to keep the home only if you know you can get current and keep current with the HOA.

The Much Greater Protection under Chapter 13

Filing a Chapter 13 “adjustment of debts” gives you much more protection against HOA debts and liens. It’s often the better tool if you’re substantially behind with the HOA and need lots more time to catch up. It may well be the only way to keep your home if you’re behind on both the mortgage(s) and HOA debts.

Chapter 13 involves you and your bankruptcy lawyer putting together a formal 3-to-5-year payment plan. That plan would show how you’d catch up with the HOA within that 3-to-5-year time span.

Same thing with any mortgage arrearage and other special debts. Most ordinary unsecured debts you’d only pay if and to the extent you had money to spare after these more important debts.

From the moment you file your Chapter 13 case and then throughout the payment time span, the HOA would usually not be able to take action against you or your home. It can’t foreclose its lien, or cause other mischief, as long as you’re paying the plan as agreed. Then at the end of your payment plan you’d be current with the HOA.

You’d also be current on or have paid off other important debts (like your mortgage, certain income taxes, and such). To the extent you haven’t fully paid other, ordinary and unsecured debts their remaining balances would get discharged. You should be debt free (except for long-term debt like your home mortgage). And you would have taken care of the dangerous HOA while protecting and keeping your home. Mission accomplished.

 

Bankruptcy Stops a Property Tax Foreclosure

August 5th, 2019 at 7:00 am

Bankruptcy can help if you’re behind on real estate taxes. Chapter 7 by getting rid of other debts, Chapter 13 by buying you lots more time.  


Bankruptcy Stops a Property Tax Foreclosure

Filing either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” stops a foreclosure by your property tax authority.

Filing bankruptcy stops most forms of debt collection through the “automatic stay.” In particular the automatic stay stops “any act to… enforce any lien against property of the [bankruptcy] estate” Section 362(a)(4) of the U.S. Bankruptcy Code. The bankruptcy “estate” includes all assets that you own when you file your bankruptcy case. It includes your home.

A tax authority’s foreclosure for property taxes is the enforcement of the property tax lien. That foreclosure becomes illegal as soon as your bankruptcy filing imposes the automatic stay.

So filing bankruptcy stops a tax foreclosure. What happens next?

Chapter 7: Discharge Your Other Debts to Afford Your Property Taxes 

If you’ve fallen behind on your property taxes, it’s likely because you’ve had other debts that you had to pay. You didn’t have enough cash flow to pay both, and likely haven’t for quite a while.

Maybe if you wrote off (“discharged”) your debts through bankruptcy you’d have enough to start paying the property taxes. Chapter 7 is usually the quickest and cheapest way to discharge your other debts. (This assumes that you qualify, and that you don’t have other reasons to file a Chapter 13 case instead.)

Most local tax authorities don’t have the legal right to foreclose on your property until you are several years behind. Talk with your bankruptcy lawyer about this. You may have some time to catch up. On the other hand, tax foreclosure rules vary greatly, and they tend to be very strict. Once it’s too late it’s simply too late.  Find out for sure where you stand on any deadlines.

Your bankruptcy lawyer should also be able to tell you whether your tax authority would likely set up a monthly payment plan for you to catch up. If so, determine whether you could afford the catch-up payments after you discharge your other debts.  

In these situations filing a Chapter 7 would give you the help you need.

Chapter 7: Often Not Enough Help

But there are many situations when Chapter 7 does not solve the problem.

First, if a tax foreclosure is happening soon, you probably don’t have enough time to catch up.

Second, even if there’s no pending tax foreclosure you may need more help for the following reasons:

  • Even after discharging your other debts you wouldn’t have enough money left over to satisfy your tax authority.
  • The tax authority doesn’t provide a way to catch up, maybe because you’ve let the collection process go too far.
  • You had a deal to catch up earlier but just didn’t have the cash flow to stick with it. Now they won’t give you another chance.
  • Your mortgage lender requires you to bring the taxes current more quickly, on threat of its own foreclosure.

Chapter 13: Buy More Time and Flexibility

Under Chapter 13 you can bring your property taxes current over a period as long as 5 years. This extended period results in lower monthly catch-up payments, making more likely that you’d succeed with it. During this time you wouldn’t be at the mercy of the tax authority. While you’d be in the Chapter 13 case you’re protected against foreclosure or any other collection activity. You do need to fulfill the terms of your Chapter 13 payment plan, as you proposed and the bankruptcy court approved. But as long as you do, Chapter 13 saves you a long of anxiety. It gives you a measure of financial consistency and stability.

Chapter 13 can also save you money in very practical way. It is a very good legal mechanism for dealing with many other special debts, such as income taxes, child and spousal support, and vehicle loans. Your payment plan may allow you to catch up on the property taxes ahead of these other special debts. So you get current on your back property taxes more quickly than with a Chapter 7 case. That saves you interest on the unpaid property taxes, which are usually assessed at a relatively high rate. Drawing down the property tax debt faster also builds equity in your home faster.

Chapter 13: When Behind on Your Mortgage, Too

Unless you own your home without a mortgage, if you’re behind on your property taxes you’re likely also behind on the mortgage. Even if you are current on the mortgage, your mortgage lender is likely threatening its own foreclosure because you’re not current on the taxes. In both of these situations Chapter 13 is usually the best option. That’s because it is especially adept at handling both of these debts simultaneously.

Chapter 13 allows you to stretch out your mortgage catch-up payments up to 5 years (just like with the taxes). Most importantly, throughout this time you are protected from foreclosure by either the tax authority or your lender.

You do have to keep current on your Chapter 13 payment plan. But those payments are based on a realistic budget. They can be adjusted for both anticipated and unanticipated changes in your income and expenses.

You do also have to keep current on ongoing property taxes, so that you don’t fall further behind. Because that’s incorporated into your budget, this should not be a problem.  You want to be completely current when you finish your payment plan, and you’re required to be. Chapter 13 gives you the means to do so.

 

Protecting Excess Home Equity through Chapter 13

July 15th, 2019 at 7:00 am

Chapter 13 can be a highly advantageous way to protect your home equity if that equity is larger than your homestead exemption amount.  

 

The Problem of Too Much Home Equity

Our last two blog posts were about protecting the equity in your home through the homestead exemption. Two weeks ago was about protecting the current equity; last week about protecting future equity. The blog post about protecting current equity assumed that the amount of equity in your home is no more than the amount of your applicable homestead exemption. For example, if your home is worth $300,000, your mortgage is $270,000, that gives you $30,000 of equity. If your homestead exemption is $30,000 or more that equity would be protected in a Chapter 7 bankruptcy case.

But what if you have more equity in your home than the applicable homestead exemption amount? In the above example, what if you had $30,000 in equity but your homestead exemption was only $25,000? Your home could conceivably be sold by the bankruptcy trustee if you filed a Chapter 7 case. Your creditors would receive the proceeds of the sale beyond the homestead exemption amount. Presumably you need relief from your creditors. But clearly don’t want to give up your home and its equity in return for being free of your debts.

What about getting that equity out of the home through refinancing the mortgage? Well, what if you don’t qualify to refinance your home? You may not have enough of an equity cushion. Or your credit may be too damaged. Or maybe you’d qualify for a refinance but it still wouldn’t get you out of debt. That would not be a good option. So what do you do instead to protect your home and that equity?

The Chapter 13 Way to Protect Extra Equity

If your home equity is larger your applicable homestead exemption, then filing a Chapter 13 case can usually protect it.  Chapter 13 “adjustment of debts” protects excessive equity better than Chapter 7. Essentially Chapter 13 gives you time to comfortably pay your general creditors for being able to keep your home.

Why do you have to pay your creditors to be able to keep your home? Remember, if your home equity is larger than your homestead exemption, the alternative is having a Chapter 7 trustee sell the house to get the equity out of it to pay to your creditors. Chapter 13 is often a tremendously better alternative, as we’ll explain here. Also, see Section 1325(a)(4) of the Bankruptcy Code.

Gives You Time to Comfortably Pay

Consider the example above about having $5,000 of equity more that the amount protected by the homestead exemption. Chapter 13 essentially would give you 3 to 5 years to pay that $5,000. This would be done as part of a monthly payment in your Chapter 13 payment plan. $5,000 spread out over 3 years is about $139 per month. Spread out over 5 years is only about $83 per month. Assuming this was part of a monthly payment that reasonably fit into your budget, wouldn’t it be worth paying that to your general creditors if it meant keeping your home and all of its equity?

It’s likely more complicated than this in your personal situation. You may be behind on your mortgage payments or owe income taxes, or countless other normal complications. But at the heart of it Chapter 13 can protect your equity in a flexible way. It’s often the most practical, financially most feasible way.

Chapter 13 is Flexible

To demonstrate Chapter 13’s flexibility, let’s add one of the complications we just mentioned: being behind on your mortgage. Chapter 13 usually allows you to catch up on your mortgage first. So, for example, most of your monthly plan payment could go to there during the first part of your case. Then after that’s caught up, most of the payment could go to cover the excess home equity. The creditors would just have to wait.

Protecting Your Excess Equity “For Free”

Sometimes you don’t have to pay your general creditors anything at all to protect the equity beyond your homestead exemption.  Consider the example we’ve been using with $5,000 of excess equity. Now, using another complication mentioned above, assume you owe $5,000 in recent income taxes. That tax is a nondischargeable” debt, one that is not written off in any kind of bankruptcy case. It’s a “priority” debt, one that you’d have to pay in full during the course of a Chapter 13 case. If you pay all you can afford to pay into your Chapter 13 plan, and it’s just enough to pay your $5,000 priority tax debt, nothing gets paid to your general creditors. You pay the priority tax debt in full before you have to pay a dime to your general creditors. If there is nothing left for the general creditors after paying all that you can afford to pay during your required length of your payment plan, you likely won’t need to pay those debts at all. 

This means that you saved the equity in your home by paying the $5,000 into your plan to pay off the tax debt. That’s a debt you’d have to pay anyway. You’d have to pay it if you didn’t file any kind of bankruptcy case. You’d have to pay it after completing a Chapter 7 case because it does not get discharged. And it also has to be paid in a Chapter 13 case. But in a Chapter 13 case you fulfill your obligation to pay the $5,000 (in our example) to protect your home equity (the amount in excess of the homestead exemption), whether it goes to the pay the tax or goes to pay the general creditors. Under the right facts you save your home and pay nothing to your general creditors.

Conclusion

Chapter 13 can be an extremely favorable way to keep a home with more equity than the homestead exemption amount. At worst, you’d pay the amount of equity in excess of the exemption. But you would do so based on a reasonable budget, with significant flexibility about the timing of payment. At best, you wouldn’t pay anything to your general creditors, when the money instead goes to a debt you must pay anyway, like the recent income tax debt in the example.

These situations depend on the unique circumstances of your finances.  See a highly competent bankruptcy lawyer to get thorough advice about how your circumstances would apply under Chapter 13.

 

Protecting Future Home Equity through Chapter 7

July 8th, 2019 at 7:00 am

Protecting present home equity is a sensible focus when considering bankruptcy. Protecting future potential equity can be even more important. 

 

Our last blog posts discussed how to protect the equity currently in your home through the homestead exemption. We discussed property exemptions in bankruptcy in general, and federal and state homestead exemptions in particular. Overall we showed how your homestead exemption can preserve the equity you presently have through a Chapter 7 case.

We mentioned that you can also protect your future home equity through these same tools, but we didn’t describe how. This is worth more attention.

Future Home Equity

Chapter 7 bankruptcy fixates on the present. It deals with debts you have at the moment your lawyer files the Chapter 7 case at the bankruptcy court. In particular, Chapter 7 usually is not interested in new assets you acquire after the date of filing, For example, the money you earn when you go to work the day after filing is outside bankruptcy jurisdiction. Again, for most purposes bankruptcy looks only at what you own on the date of filing.

This is also true as far as your home is concerned. Chapter 7 fixates on how much equity you have in the home at the moment of filing. That is, we look at what the home is worth then, and how much debt there is against it. (The debt includes all valid security interests against the home: mortgages, property taxes, income tax liens, etc.)

But those factors that determine your home equity—the home’s value, and the amount(s) you owe against it—change. They change all the time. The home’s value goes up and down (but mostly up) with the market. The debt on the security interests change every day with interest and every time you make a payment. Generally after filing bankruptcy and getting your financial house in order, you’d make progress paying down home debts. With the home value usually going up and debt against it going down in the years after filing bankruptcy, most people build equity in their home.  

Future Home Equity Greater than Present Homestead Exemption Amount

There’s a good chance that at some point—if you keep your home long enough—the amount of your home’s equity will exceed the applicable homestead exemption.

Take this example. A home is worth $300,000, the mortgage is $260,000, with a remaining equity being the difference, $40,000. Assume the applicable homestead exemption is $50,000. That covers the $40,000 in equity.

Now let’s say that in 3 years the home value increases to $335,000, and the mortgage is paid down to $250,000. The amount of equity at that point is the difference: $85,000. That’s $35,000 more than the applicable $50,000 homestead exemption (assuming that hasn’t been increased in the meantime).

If this homeowner filed a Chapter 7 bankruptcy now, the $40,000 in present equity is protected by the homestead exemption. But what if the homeowner doesn’t file bankruptcy now but waits 3 years to do so? The home equity will at that point have increased well beyond the amount the homestead exemption would protect.

Future Equity is Even More Important than Protecting Your Home Now

Sure, when you’re considering bankruptcy, your focus is on the present. As far as protecting your home equity, mostly all you want to hear from your bankruptcy lawyer is that the equity is covered now. Is the home equity going to be protected?

But as you think about whether you should file bankruptcy, Chapter 7 or Chapter 13, and when to do so, potential future equity is arguably an even more important consideration.

Most directly, there are simply likely more dollars at stake in future equity vs. present equity. In the above example, the person was protecting $35,000 in home equity when filing bankruptcy now. But by the same bankruptcy filing he or she was protecting $85,000 in future equity. Isn’t protecting that future $85,000 at least as important in protecting the present $35,000 in value?  

Conclusion

When you consider whether to file bankruptcy, you’re thinking about both the present and the future. You want relief and a fresh start now so that you can have a more financially peaceful and prosperous future. When thinking about your home, Chapter 7 allows you to preserve your present modest equity now so that it’ll have the opportunity to build it into much larger future equity.

Protecting Your Home Equity through Chapter 7

July 1st, 2019 at 7:00 am

You can protect the equity in your home if the amount of equity is no more than the homestead exemption applicable to residents of your state. 


 

Our last two blog posts outlined 15 separate ways that bankruptcy can protect your home now and/or in the future. We’ll be explaining each one of these ways in 15 separate blog posts. Here is the first one—protecting present and future equity in your home through Chapter 7 “straight bankruptcy.”

Property Exemptions in General in Bankruptcy

When you file a bankruptcy case, your assets are protected through a set of “exemptions.” “Exemptions” are categories of your assets that are protected for you from your creditors. Each category usually has maximum dollar limits. (See Section 522 on “Exemptions” in the U.S. Bankruptcy Code.)

Exemptions work somewhat differently in Chapter 7 and Chapter 13. Focusing today on Chapter 7, this is a “liquidation” form of bankruptcy. This means in theory that the Chapter 7 trustee takes—liquidates—anything you own not fitting within an exemption. 

However, the practical effect of exemptions is that most people filing under Chapter 7 get to keep everything they own.

The Homestead Exemption

The homestead exemption determines how much equity in your home you can protect from your creditors. As long as the amount of equity is no more than the homestead exemption amount, your home is safe in a Chapter 7 case.

As a quick example, assume your home is worth $300,000, you owe $265,000, so you have equity of $35,000. If the homestead exemption applicable to your state is $35,000 or more, your home is protected.

This means that your Chapter 7 trustee can’t take the home and sell it to pay the equity over to your creditors.

If you have too much equity, you wouldn’t be filing under Chapter 7. Not if you want to keep your home. See next week’s blog post about preserving home equity that’s more than your homestead exemption through Chapter 13.   

Federal vs. State Exemptions

Bankruptcy law provides a set of federal exemptions, while each state has its own set of exemptions as well. All have a homestead exemption. Can you use either the state or federal homestead exemption? If so, which should you use?

At the outset, since bankruptcy is a federal procedure why is state exemption law applicable at all?                                                    

The U.S. Constitution made bankruptcy a federal procedure to make it uniform throughout the country.  See Article I, Section 8, Clause 3 of the Constitution. But there are many areas in bankruptcy where state laws apply. One such broad area is property law. In an interesting compromise, Congress gave each state the power to require its residents to use that state’s set of exemptions instead of the federal ones. Section 522(b)(2) of the Bankruptcy Code.

So 31 states have decided you must use the state law exemptions. In the remaining 19 states you can use either the state or federal bankruptcy exemptions. Since the list is shorter these 19 states that give you a choice are:

Alaska, Arkansas, Connecticut, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Rhode Island, Texas, Vermont, Washington, and Wisconsin.

The Amount of Your Homestead Exemption

The homestead exemption amounts vary greatly state to state. For example, Kentucky’s homestead exemption protects only $5,000 in value or equity for an individual homeowner. On the opposite extreme, Nevada’s homestead exemption is $550,000. Plus a number of states—including Texas and Florida– have no dollar limit at all (although do have acreage limitations).

This can get quite complicated. For example, Kentucky residents can chose to use the federal homestead exemption instead of the modest state exemption.  But in all states you can’t pick and choose between the various federal and state exemptions. Section 522(b)(1) of the Bankruptcy Code. If you are in a state where you can use the federal homestead exemption, you can’t use any of the state exemptions that might be better for another category of assets. In the example of Nevada and Florida residents, who have such a large or unlimited homestead exemption, if they use that advantageous state homestead exemption they must use their state’s exemptions even if the federal ones may be better in other property categories.

Also, you can’t move to a new state and immediately claim that state’s generous homestead exemption. You must be “domiciled” in your new state for 730 days, or two years. Section 522(b)(3) of the Bankruptcy Code

Finally, your homestead exemption might be limited by a federal cap on the amount you can clam if you bought your home within 1,215 days (3-years and 4 months) before filing bankruptcy. Section 522(p) of the Bankruptcy Code. Effective April 1, 2019 (and for 3 years thereafter), this cap amount is $170,350. This is relevant only if your state homestead exemption is larger than this relatively large amount.

Need Legal Advice

There are other potential complications, depending on your situation. For example, what qualifies as a “homestead” to which you can apply the homestead exemption? What if you’re not on the title but instead buying a home on contract? What about leasehold interests you may have?  What happens if you own the property with your spouse, or with somebody else?

Your homestead exemption situation could well be very straightforward. But it may not be, even when it seems like it is. You need to get legal advice about this. It would be one of the first topics you would cover with your bankruptcy lawyer, and hopefully get reassured about.

Bankruptcy—including Chapter 7—can be a great way to protect present and future equity in your home. But it’s crucial to know for sure which homestead exemption applies to you, and whether it will definitely protect your home.

 

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.

 

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