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Bankruptcy Helps You Afford Your Mortgage

July 22nd, 2019 at 7:00 am

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


 

Both Chapter 7 and Chapter 13 Improve Your Cash Flow

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

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

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

Chapter 7 Helps You Pay Your Mortgage

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

 

More Bankruptcy Benefits for Your Home

June 24th, 2019 at 7:00 am

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


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

8. Judgment lien “avoidance”:  

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

9. Prevent future judgment liens:  

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

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

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

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

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

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

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

13. Protect your home from your homeowners’ association:

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

14. Buy time to sell your home:

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

15. Resolve accounting disputes with your mortgage lender:

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

 

Bankruptcy’s Many Benefits for Your Home

June 17th, 2019 at 7:00 am

Bankruptcy can save and protect your home in many different ways. One of these may be just what you need. Or you may use them in combination.   

 

We’ve got 15 distinct ways that bankruptcy can either save your home now or protect it in the near future. Here are the first 7—the remaining 8 we’ll give you next time:

1. Home equity protection:

 You can just about always protect any equity you have in your home through bankruptcy. You can do so through Chapter 7 “straight bankruptcy” if the amount of equity is no more than your applicable homestead exemption. (This is based on state or federal law, depending on your state.) Even if you have no equity in your home now, bankruptcy can protect equity that you build up going forward. See Section 522(b)(2), (b)(3), and (d)(1) of the U.S. Bankruptcy Code.

2. Home equity larger than homestead exemption: 

If your equity is larger your applicable exemption, then a Chapter 13 “adjustment of debts” can usually protect it better than Chapter 7. That’s because it give more time and a better way to preserve that equity while under bankruptcy protection. See Section 1325(a)(4) of the Bankruptcy Code.

3. Free up cash flow for your mortgage payments:

If you’re not behind on your mortgage, write off your other debts to have money for your monthly mortgage payments. Talk with your bankruptcy lawyer to find out which debts will likely go away, and which may not. He or she will also help you create a post-bankruptcy budget. Hopefully it will showing that you can afford the mortgage after getting rid of the other debts. See Sections 727 and 1328 of the Bankruptcy Code.

4. Catch up with a forbearance agreement:  

If you’re not far behind on your mortgage, write off your other debts through Chapter 7. Then catch up on your missed mortgage payments through a forbearance agreement with your mortgage holder. Instead of paying other debts, put your money into saving your home. A forbearance agreement gives you a specific amount of time to get current, usually through designated extra payments.  

5. More time to catch up:

Chapter 13 gives you 3 to 5 years to catch up on your mortgage. This is generally much more time than you’d get through a forbearance agreement. With the catch-up payments spread out longer, they’re much smaller, and so more affordable. Throughout those catch-up years your mortgage lender can’t take collection or foreclosure action as long as you follow the agreed payment plan. See Sections 1322(b)(2) and 362(a)(4) and (5) of the Bankruptcy Code.

6. Prevent property tax foreclosure:

Pay back property taxes through a Chapter 13 payment plan. Again, you have 3 to 5 years to catch up, and protection from tax foreclosure in the meantime. Plus your budget will includes money for future property taxes so you won’t need to worry about that going forward.

7. “Strip” a junior mortgage.

“Strip” a second or third mortgage from your home’s title, thus greatly reducing your overall mortgage debt. If you meet the required conditions, you can stop paying the second and/or third mortgage payments. You’ll likely end up paying none or only a small part of a “stripped” mortgage balance. As a result the total debt on your home will get closer to the home’s value. You’d be able to create future equity faster as the home’s value increases in the future.

 

Your Paid-Current Home Mortgage in Chapter 7 and 13

November 29th, 2017 at 8:00 am

There are scenarios when you are current on your home mortgage and are dealing with other home-related debts where Chapter 7 works well.

 

You’re current on your home mortgage payment, although you’ve been struggling mightily to keep it that way. You’re thinking very seriously about getting some financial help through bankruptcy. But you absolutely want to keep the home that you’ve fought so hard to keep current.

You’re trying to decide between Chapter 7 and Chapter 13, and are about to see a bankruptcy lawyer. So far you see some advantage in one or the other, or maybe in both. Maybe Chapter 7 is attractive because it seems easier and quicker. Or maybe Chapter 13 looks better because it handles certain of your special debts better. Either way you want to make sure you can keep paying your mortgage so you can keep your home.

How does this work in Chapter 7 and Chapter 13? Today we’ll start with Chapter 7, and get to Chapter 13 later.

Chapter 7

If you’re current on your home mortgage payments you can virtually always keep your home under Chapter 7 “straight bankruptcy.”

A big set of considerations is whether you are also current on and/or have manageable ways to deal with other debts on your home.

Other Home-Related Debts

There are other debts related to your home that can cause significant problems even if you’re current on your mortgage. Some of these debts are better handled under Chapter 13 “adjustment of debts.” Some are tremendously better under Chapter 13. On the other hand some are handled just fine under Chapter 7. How these considerations apply to your situation can often affect which of these two options would be better for you.

These other home-related debts include the following:

  1. Second or third mortgages
  2. Property taxes
  3. Income tax owed with a lien recorded on your home
  4. Judgment with a lien attached to your home
  5. Homeowner association debt with a lien
  6. Child/spousal support unpaid with a lien

Current on or Make Arrangements to Pay Home-Related Debts

Chapter 7 likely makes sense in the following situations with the types of debts just listed above. Generally these are when you’re either current on these debts or can make reasonable arrangements to pay them. We’ll cover the first 3 of these types of debts today and the other three in our next blog post.

1. Second or third mortgages:

Chapter 7 makes more sense if your home is worth than your first mortgage debt balance. (Or the combination of your first and second mortgage balances if you have a third mortgage.) Plus you’re current on your second (and, if applicable, your third) mortgage. If you’re not current you’ll be able to catch up fast enough to satisfy that mortgage lender.

If, however, your home is worth less than your first mortgage, you may be able to “strip” your second mortgage from your home’s title. This is only available through Chapter 13. “Stripping” your second/third mortgage could save you a tremendous amount of money. That would often make Chapter 13 a potentially much better option. (Similarly if you have a third mortgage and your home is worth no more than the first two mortgage balances.)

Also, if you are significantly behind on your second and/or third mortgage but don’t qualify for “stripping” that mortgage, you may need the extra help that Chapter 13 can give in getting caught up.

2. Property taxes:

If you’re current on your property taxes of course you’ll need to stay current. Discharging all or most of your other debts in a Chapter 7 case should make this easier.

If you aren’t current you’ll need to do so quickly or else your mortgage lender will be very unhappy. Even if current on your mortgage, falling behind on your taxes is a separate basis for foreclosure by your lender. If you can’t catch up fast enough on your property taxes to satisfy your lender, you may need Chapter 13 to buy more time.

3. Income tax owed with a lien recorded on your home: 

Usually, under Chapter 7 you have to pay a tax that is backed up by a lien on your home. You also have to pay the ongoing interest and penalties. If the debt is relatively small, and you can make the monthly payments required by the IRS or state, Chapter 7 may be your best option.

However, is the underlying income tax old enough so that it could be discharged if there was no lien? Is there insufficient equity in the home to cover the entire tax lien? In these situations you may avoid paying such a tax, or paying only a portion, under Chapter 13.

(Again, we’ll cover the final three types of debts listed above in our next post in a couple days.)

 

The Automatic Stay in Chapter 7 and 13

November 22nd, 2017 at 8:00 am

Filing a Chapter 7 or 13 case both stop creditor collection actions against you just the same. But after that the differences are huge. 


Last time we focused on how you can use the Chapter 7 and Chapter 13 options to your time advantage. Chapter 7 “straight bankruptcy” is very fast. If all or most of your debts can be discharged (written off), that quickness can be an important advantage. But its speed can be a downside. If you are behind on a secured debt, Chapter 13’s 3-to-5-year-long duration can be a crucial advantage. It not only buys you time but gives your protection and flexibility for dealing with such special debts.

So, both bankruptcy options provide protection, but of different kinds. Let’s see how these work to see which would be better for you.

The Immediate Protection

With either kind of bankruptcy you get immediate relief from almost all creditor collection actions.

The “automatic stay” kicks in simultaneously with the filing of your Chapter 7 or 13 bankruptcy petition. Its power is in how fast it works and how strongly it prevents creditors from taking further collection action against you. (See Section 362(a) of the U.S. Bankruptcy Code.)

How Long the Protection Lasts

The automatic stay lasts as long as your case does. So, it expires about 3-4 months after you and your bankruptcy lawyer file a Chapter 7 case. On the other hand, it expires about 3-to-5-years after filing a Chapter 13 case. (See Section 362(c) of the U.S. Bankruptcy Code.)

However, a creditor may be able to end that protection as applicable to that creditor. Creditors usually can’t prevent the automatic stay from going into immediate effect at the beginning of your case. However creditors CAN ask for “relief from the automatic stay.” That is, AFTER the automatic stay goes into effect a creditor can ask the bankruptcy court to make an exception for that creditor and let it pursue you or its collateral.   (See Section 362(d) of the U.S. Bankruptcy Code.)

How does all this all works in practice under Chapter 7 vs. Chapter 13?

Chapter 7 Is Not Designed for Ongoing Protection

As we’ve said, the automatic stay protection lasts just 3-4 months at best under Chapter 7. But in addition, certain important creditors have more reason to ask for “relief from stay” to make that even shorter.

Chapter 7 provides no mechanism for dealing with important debts that you want or need to pay. Consider debts backed by collateral you want to keep, such as a home mortgage or vehicle loan. If you’ve fallen behind there’s no tool under Chapter 7 for catching up. You have to make arrangements directly with the creditor. If you (through your lawyer) and the creditor can agree, that’s fine. But if not, the creditor can file a motion asking for permission to foreclose on or repossess the collateral. It may even do so right after you file your case, before you’ve even started any negotiation. It’s signaling that you better meet its terms or else it wants to take back the home or vehicle.

Chapter 13 IS for Ongoing Protection

Chapter 13 starts with the fact that the automatic stay lasts SO much longer. It lasts a few years instead of a few months. But just as with Chapter 7, under Chapter 13 a creditor with collateral can file a motion asking for permission to foreclose on or repossess the collateral.

The big difference is that Chapter 13 provides a mechanism for catching up on such debts. If you’re behind on a mortgage or loan with collateral, your Chapter 13 payment plan will specify how much you’ll pay each month to catch up. Assuming your proposed terms are sensible, the creditor will likely go along.

A key difference is that Chapter 13 gives you an efficient and effective way to take the initiative. Because creditors know that bankruptcy judges will approve reasonable terms, they don’t object. And they don’t waste their time and money asking for “relief from stay” knowing it would have no effect. Then once your proposed payment plan is formally approved by the judge, creditors must live with your terms.

Be aware that if a creditor thinks your catch-up terms are not reasonable it can object or file a motion. Then usually a compromise can be worked out.

Of course you have to comply with the terms of your plan as approved by the bankruptcy judge. If you don’t, the affected creditor can then file a motion asking to be allowed to pursue the collateral. Depending on the facts you may be given another chance or you may not.

Conclusion

The relatively short period of protection under Chapter 7 may be just fine if you have no surviving debts. Chapter 7 may also be fine if the surviving debt can be handled reasonably through simple negotiation. But Chapter 13 provides longer and stronger protection for you regarding past-due debts secured by collateral you want to keep.

 

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.  

 

A Second Mortgage “Strip” through Chapter 13

September 6th, 2017 at 7:00 am

If you own a home with a qualifying 2nd or 3rd mortgage, one of the best reasons to file a Chapter 13 case is to “strip” off that mortgage.  

 

Chapter 13 can help you keep your home in many powerful ways. Of those “stripping” a second or third mortgage can likely save you the most money. If you qualify, you can stop paying that mortgage immediately. And it can save you a tremendous amount of money in the long run.

Second or Third Mortgage Under Chapter 7 “Straight Bankruptcy”

If you file a Chapter 7 case you are not able to “strip” a mortgage. You simply have to pay any second and third mortgages on your home or lose the home. The mortgage is a lien on your home, so you have to pay it or the mortgage lender will foreclose on your home.

If your home is worth less than the combined balances of your first and second mortgages you may be able to sell your home through a “short sale.” In this situation the second mortgage lender accepts less than its full balance when you sell the home. But you may be left owing the balance. And in any event, this is not a way to keep your home.

The Chapter 13 Mortgage “Strip”

Only Chapter 13 gives you the possibility of “stripping” that junior mortgage lien off your home’s title. The key factor in qualifying is your home’s value. A second mortgage can be stripped from the home’s title if ALL of the home’s value is encumbered by liens that come ahead of the second mortgage lien on the home’s title. All of the home’s equity is taken up by the prior liens, leaving no equity for that second mortgage.

Under this situation the second mortgage debt is effectively unsecured. What’s special about Chapter 13 is that it provides a way for a court to declare this debt to be unsecured debt. Then that second (or third) mortgage is treated accordingly.

This means that in your Chapter 13 plan you no longer have to make your monthly payments on that mortgage. Instead, during life of your payment plan you pay it only as much as you can afford to pay. This means other special debts can be paid in full before that stripped mortgage debt receives anything. The mortgage balance is lumped in with all your other low-priority “general unsecured” debts. This usually means that you pay only pennies on the dollar on that mortgage debt. Then no matter how long you were contracted to pay that mortgage, at the end of the 3-to-5-year Chapter 13 case the unpaid portion is permanently written off. Your home gets much closer to having future equity through stripping away that second or third mortgage.

Here’s an example to show how this powerful tool works.

The Example

Assume that you’ve owned a home for 10 years now worth $300,000. It lost a lot of value during the “Great Recession” of 2008-2010 and hasn’t gained it all back yet. You owe a first mortgage of $310,000 and a second mortgage of $20,000. The second mortgage has monthly payments of $325, with a bit more than 8 years to pay on it. It has a high interest rate of 8%—your credit wasn’t the best when you got this second mortgage loan.

Let’s also say that you were unemployed for several months and so you fell behind on both mortgages. You are thousands of dollars behind. You also fell behind on other debts. You have found a new job but it doesn’t pay as well as the earlier one. So you need relief from your debts and need help in preventing your home from being foreclosed.

You really want to keep your home instead of walking away from it. It’s been the family home for a long time. It’s close to your new job, and to the schools your kids have been going to. Home and apartment rents are rising in your area, so any other housing would be expensive. Mortgage qualifying standards are tighter now than they were before the Great Recession. So you know that it would be quite a while before you could buy a home again.

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

“Stripping” Your Second Mortgage

In this scenario you’d be able to “strip” your $20,000 second mortgage off your home’s title through Chapter 13. Your bankruptcy lawyer would file a motion in the bankruptcy court to do so. Those papers would show that the home’s value—$300,000—is less than the amount of the first mortgage—$310,000. So all of the home’s equity is fully taken up by this first mortgage lien, which is legally ahead of the second mortgage. So the bankruptcy judge would declare the second mortgage lien to be “stripped” off your home’s title. Then the debt you owe on the second mortgage—the $20,000—would be treated as an unsecured debt.

The Great Results

As a result:

  • You could immediately stop making the $325 monthly payments. This would make it that much easier for you to pay the monthly payments on the first mortgage.
  • You would not need to catch up on the second mortgage late payments. So during your Chapter 13 case you could concentrate on catching up on your first mortgage. If behind on 6 payments of $325 on your second mortgage, that’s $1,950 you would not have to pay.
  • Your now-unsecured $20,000 second mortgage balance is treated like any other unsecured debt. So you’d pay it only as much as you could afford to during the 3-to-5-year life of the plan. In most plans there is only a certain amount available to pay all unsecured creditors. So, adding the second mortgage balance often doesn’t increase what you pay into your payment plan.
  • When you get to the end of your Chapter 13 case the entire unpaid second mortgage balance is “discharged.” It is legally written off. The resulting savings would be substantially more than the $20,000 present balance. That’s because of the substantial amount of otherwise accruing interest that you would also avoid paying.
  • Stripping the second mortgage off your home’s title would get you substantially closer to building equity in your home.

 

Catching up on Property Taxes When You Have a Mortgage

August 11th, 2017 at 7:00 am

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

The Problem

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

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

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

When Chapter 7 “Straight Bankruptcy” Solves This Problem

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

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

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

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

With Chapter 13 You Buy Lots of Time

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

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

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

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

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

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

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

At the End of the Case

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

 

Catching up on Your Mortgage on Your Terms

August 9th, 2017 at 7:00 am

If you’ve fallen behind on your mortgage, it’s very hard to catch up. It may even seem impossible. Chapter 13 makes it possible.

 

The Problem

Let’s say you can’t pay your monthly mortgage because of a job loss or some other major financial hit. The missed payments can pile up fast. The amount you’re behind gets huge fast. It usually takes quite a few months before your home would be foreclosed. That gives time for the missed monthly payments to pile up. For example, if your mortgage payment is $1,700, six missed payments put you $10,200 behind. And that doesn’t count late fees and other likely charges assessed to your account.

If you then find a new job or otherwise fix your financial situation, you’ve got a mountain of mortgage payments to catch up on.

You may qualify for a mortgage modification or refinancing, restructuring that piled up debt, not having to catch up. Or mortgage forbearance may work, in which you must catch up over a relatively short period of time, usually within a year.

But there’s a good chance you can’t qualify for a modification or refinancing. And when money is tight it may be impossible to come up with the substantial extra amount needed each  month—in addition to your current mortgage payment—for catch-up payments. Using the example above, if you had 12 months to catch up on the $10,200 arrearage that would require you to pay an extra $850 per month, on top of your regular monthly mortgage payment. Even after filing a Chapter 7 “straight bankruptcy” to get rid of all or most of your debts, you may simply not have the cash flow to catch up as required.

The Solution: Get Years to Catch Up

If you’re behind on your mortgage, filing a Chapter 13 case usually gives you up to 5 years to catch up.

In a Chapter 7 case you’re largely stuck with however much time your mortgage holder is willing to give you. In Chapter 13 you are much more in the driver’s seat. You and your bankruptcy lawyer put together a payment plan. That plan shows how and when the mortgage will be caught –up during the following 3 to 5 years. That plan works around your budget, giving you enough money for your reasonable living expenses. It takes into account other even more urgent and just as important other debts. So you don’t lose your house because you also owe other debts like income taxes or child support. You can often save both your home and your necessary vehicle(s).

For example, the above $10,200 stretched out over 5 years is about $170 per month. That’s likely much more doable than the $850 per month to catch up within one year.

Does My Mortgage Lender Have to Agree?

The length of time you have and the terms for catching up do depend on your circumstances. Generally, the more equity you have in your home (value beyond its debt) the more flexibility you will have. When there is little or no equity cushion your lender’s debt is not fully protected by the collateral. Then you’ll have to make faster progress on catching up on the mortgage arrearage.

But generally your mortgage lender must give you a number of years—to get current.

However, especially if you have little or no equity in the home and/or you have gotten far behind on the mortgage payments, the mortgage lender could likely impose conditions on the Chapter 13 catch-up payments. These conditions could limit your rights if you didn’t timely pay either the catch-up or regular monthly payment. Such future non-payments could automatically trigger the bankruptcy court’s permission for the lender to start (or re-start) foreclosure proceedings.

So, Chapter 13 gives you a relatively long time to catch up on your missed mortgage payments. But then it’s crucial to comply with the payment plan. Chapter 13 gives you a big second chance, but not necessarily a third or fourth chance.

 

An Example of Surrendering Your Home Later in a Chapter 13 Case

August 26th, 2016 at 7:00 am

Here’s an example of how Chapter 13 can allow you to hold onto your home but then change your mind about it later. 

 

Our last blog post introduced the option of saving your home through Chapter 13, while keeping open the possibility of surrendering the home later if your circumstances change. 

Advantage of Keeping Your Options Open

Sometimes it’s hard to know whether hanging onto your home is worth the money and effort. For example, if you were about $10,000 behind on your mortgage and property taxes, and could get that money by borrowing from a relative or from a retirement account, would that be worthwhile? What if the home had no equity—the mortgage loan balance was higher than the value of the home? What if you were not confident you could afford to pay back that $10,000 loan? What if the main current reason to stay in the home now would no longer apply in a couple years?  

If you filed a Chapter 7 “straight bankruptcy” case you would have to make that decision quite quickly. If your mortgage lender was in the process of foreclosing your home, or was threatening to do so, a Chapter 7 filing protects your home for only about 3 months, sometimes less. You effectively have about that much time to decide whether to keep your home, and to figure out how.

And what if you don’t have any means to come up with that $10,000—no rich relative or retirement account?  What if you simply don’t have the means, even after reducing your debts as much as possible through Chapter 7, to catch up on the mortgage as fast as the mortgage lender demands?

Chapter 13 Solution

Not only does Chapter 13 give you some remarkable tools for saving your home. It often also gives you the option of later changing your mind and surrendering the home.  We’ll illustrate this in a practical way within the fact scenario presented in our last blog post. Please look at that scenario before reading further here.

Our Scenario

Going back to the hypothetical facts presented last time, you and your spouse decide to file a Chapter 13 case.  You really want to hang onto your home. Your attorney has advised you that filing a Chapter 7 case would not get you there.

It’s especially important for you and your family to be able to stay in your home for the next 3 years. That’s because you have two kids very involved in their local public high school, and absolutely want them to be able to finish there.  

You and your spouse would love to keep your home forever. But if necessary you’re willing to lose it three years from now after both kids have graduated. So you’re willing to take some risks to get there. So, even though you’re not confident that you’ll be able to keep your job, and even though you have concerns about possible upcoming medical expenses for your spouse, you are both willing to work hard and take some risks to try to keep the home for at least these upcoming 3 years.

Chapter 13 Plan

So after being fully informed by your bankruptcy lawyer, you and your spouse file a Chapter 13 case.  The following good things happen:

·         Your Chapter 13 payment plan provides that you slowly begin paying the $6,000 you’re behind on your first mortgage, with $100 monthly payments stretched out over the 5 years of your projected case. That’s much less than virtually any mortgage lender would otherwise allow. The relatively low monthly amount makes catching up easier and so more likely to be ultimately successful.  Also, it minimizes your investment in the home each month if you do end up changing your mind later.   
·         Your Chapter 13 plan similarly stretches out catch-up payments towards the $2,000 in home property tax arrearage, with payments of $50 per month. The benefits above apply here as well.
·         Your $20,000 second mortgage is “stripped” off your home’s title, because there’s no home equity securing it. You no longer have to make the monthly payments, nor ever have to catch up on the accumulated late payments. Plus with that mortgage lien off your title, you’re that much closer to building equity in your home. (Second mortgage “stripping” is only available under Chapter 13, not under Chapter 7.)
·         Your court-approved Chapter 13 plan “avoids”—removes—a $10,000 judgment lien that a creditor recently recorded against your home’s title, arising from an unpaid hospital bill. This judgment lien “avoidance” procedure can also be done under Chapter 7 in the right circumstances. But it’s all the more powerful when done in conjunction other features available only under Chapter 13.
·         The $20,000 second mortgage balance and the $10,000 judgment debt are both now treated as “general unsecured” debts. These are added to the $50,000 in other medical debts and credit card balances. So your unsecured debts now total $80,000.

What Happens to the “General Unsecured” Debts

Through your Chapter 13 plan you pay only as much of this $80,000 in unsecured debts as your budget allows. Usually, if all you can afford to do during your time in Chapter 13 is catch up on the first mortgage and property taxes (and pay the trustee’s fee and any remaining attorney fees), you would pay nothing on that $80,000.

Even when you do pay some portion of it, because your plan pays the secured debts first, the unsecured debts often receive little or nothing in the first couple years of your case. This, too, minimizes how much you pay during the early years of your case. That’s beneficial if you decide to surrender the home later.

Two Possible Endings to Our Scenario

As the Chapter 13 case plays out in this scenario, you and your spouse either succeed in making the plan payments over the months and years, or don’t. You either keep your job, or bring in a similar amount of income from another job, or you don’t. Your spouse either avoids needing a lot more medical care and piling on a lot more expenses, or doesn’t. 

If you succeed in paying as your Chapter 13 plan envisioned, you can hold onto your home permanently. By the completion of your case you will have caught up on your first mortgage and the property taxes. The second mortgage and judgment liens will have been removed from the title to your home. And whatever you haven’t paid of the remaining unsecured debts will be discharged. You will be current on your home obligations and be otherwise debt-free.

But if your income decreases or your expenses increase so that you are not able to maintain your Chapter 13 plan payments throughout the entire 5-year course of your case, at that point you could decide to surrender your home. Depending on the circumstances you may then decide to amend your payment plan to exclude the home obligations. Or more likely you would convert your case into a Chapter 7 one, discharging all your debts so that you would be debt-free within a few months of that. In the meantime, you had succeeded in holding onto your home long enough to keep one, and hopefully both, of your kids in their school through graduation.

You would have benefitted from this flexibility provided only by Chapter 13.

 

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