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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.

 

“Avoiding” a Judgment Lien on Your Home in Chapter 13

July 27th, 2016 at 7:00 am

Both Chapter 7 and Chapter 13 can wipe away judgment liens. But doing so under Chapter 13 can be better when used with its other benefits.  

 

In our July 1 blog post we gave a list of 10 ways that a Chapter 13 case can help you keep your home. Today we cover the 9th of those 10 ways. Here’s how we introduced this earlier.

9. Judgment Lien “Avoidance”

A judgment lien is put on your home by a creditor who sues and gets a judgment against you. It then records that judgment in the county where your home is located. (Or the creditor uses whatever procedure creates a judgment lien in your state).

In bankruptcy, a judgment lien can be removed from your home under certain circumstances. Essentially, the equity in your home that’s encumbered by the judgment lien must be covered by the applicable homestead exemption. In other words, the judgment lien must “impair” the homestead exemption. If it does, the judgment lien can be removed, or “avoided,” from the title of your home.

Judgment lien “avoidance” is available under Chapter 7 as well as Chapter 13. But Chapter 13 can be better when lien “avoidance” is used in combination with other tools only Chapter 13 provides.

Here’s how this works in practice.

The Example

Assume that you own a home that is worth $200,000. You lost your job 18 months ago and were unemployed for 12 months. As a result you fell 9 payments behind on the $1,200 monthly mortgage payments, a total of $10,800 behind. The full amount owed on the mortgage is $180,000. Your mortgage lender is threatening to foreclose on the home if you don’t quickly catch up on the missed payments.

During your unemployment you also couldn’t make the payments on a credit card with a balance of $7,500. It was sent to collection and the collection company sued you. You didn’t respond to the lawsuit because you knew you owed the money and saw no benefit to objecting. So the collection company got a default judgment against you. The amount of the judgment is $8,750, since the collector could add its costs of the lawsuit to the judgment. The collector then recorded a judgment lien against your home in that amount.

So your $200,000 home in encumbered by the $180,000 mortgage plus the $8,750 judgment. Assume also that you are entitled to a $25,000 homestead exemption.

The Judgment Lien “Avoidance” Here

Under either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts,” this $8,750 judgment lien can be removed from your home’s title.

That’s because the equity in your home that the judgment lien is encumbering is protected by the homestead exemption.

Here’s how the math works. Without the judgment lien, there’s $20,000 in equity in the home—its $200,000 value minus the $180,000 mortgage. The $25,000 homestead exemption would protect up to $25,000 of equity. So, all of the $20,000 in equity is protected. The entire $8,750 judgment lien eats into, or “impairs,” this protected equity. And so the entire judgment lien can be “avoided,” or released from your home’s title through bankruptcy.

The Chapter 7 Possibility

If you filed a Chapter 7 case and “avoided” the judgment lien you would likely also be able to “discharge”—legally write off—that $8,750 credit card debt. The debt would be gone, and the judgment lien would be gone off your home, and the debt itself would be gone forever. Mission accomplished there.

But that still leaves you $10,800 behind on your mortgage. Discharging your other debts may leave you with some available money each month to pay towards this mortgage arrearage. If so, you might be able to make a deal with your home mortgage lender for catching up on the mortgage. If so, go for it.

However, often the amount that you could pay towards the mortgage arrearage would not be enough to satisfy your mortgage lender. Mortgage lenders in this situation often insist on homeowners catching up within 10-12 months. That’s amounts to about $1,080 to $1,200 per month under our facts. And you’d have to pay that on top of the regular ongoing monthly payments of $1,200.

You may simply not have much extra money in your budget even after a Chapter 7 case.  You may not be able to catch up on your mortgage fast enough to satisfy your mortgage lender. If so it wouldn’t do much good to “avoid” the judgment lien on your home only to lose it to a mortgage foreclosure.

The Chapter 13 Advantage

If you and your bankruptcy lawyer instead filed a Chapter 13 case, it could solve this dilemma. Your mortgage lender would be forced to give you MUCH more time to catch up on the mortgage arrearage.

A Chapter 13 payment plan usually lasts from 3 to 5 years. You are generally allowed to push it out the full 5 years in order to reduce how much you would need to pay your mortgage lender monthly.

The payment plan can often be creative by adjusting for anticipated changes in your income or expenses. You may be able to pay less on the mortgage arrearage early in the plan to deal with even more urgent debts. Sometimes you can even pay all or part of the arrearage through a later refinancing or sale of the home.

The bottom line: when you need to “avoid” a judgment lien but also need other benefits that Chapter 13 provides, look closely at that option. Chapter 13 takes much longer but those benefits may make it well worthwhile.

 

Flexibility in Selling Your Home through Chapter 13

July 11th, 2016 at 7:00 am

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

 

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

3. Much Greater Flexibility in Selling Home

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

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

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

The Example

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

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

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

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

Chapter 7 Won’t Likely Solve the Problem

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

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

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

Chapter 13 Buys You Time to Sell Your Home

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

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

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

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

Conclusion

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

 

Catching up on Your Home Mortgage through Chapter 13

July 6th, 2016 at 7:00 am

You have much, much more time to catch up on unpaid mortgage payments, as well as any unpaid property taxes.

 

 

Last week we wrote a blog post that listed 10 ways Chapter 13 helps you keep your home. Here’s the first of those ways it can help:

1. Gives You More Time to Catch up on Unpaid Mortgage Payments

Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up on your mortgage loan. In contrast Chapter 13 often gives you years to catch up. This can greatly reduce how much you have to pay each month to eventually get current. The much lower catch-up payments per month can be crucial. That’s especially true if you are many thousands of dollars behind on your mortgage(s). Having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.

We recognize that this explanation might be a little dry. So today let’s see if we can bring it to life and have you can see how this Chapter 13 benefit could really help you.

An Example

Assume that your monthly mortgage payment, including the property tax “escrow” portion, is $1,200. Because of losing your job 2 years ago, you fell behind by 10 payments, or $12,000. You’ve gotten a new job but it does not pay as well as your earlier one. So cash flow is very tight.

You want to keep you home but the mortgage lender has threatened foreclosure for being so far behind. Your bankruptcy lawyer has advised you that if you filed a Chapter 7 “straight bankruptcy” case this lender would likely give you about 12 months to catch up on your missed payments. This means having to pay $1,000 per month on top of your regular $1,200 mortgage payment. Even after legally writing off your debts in a Chapter 7 bankruptcy, you could absolutely not come up with that extra $1,000. So you would not be able to satisfy your mortgage lender and would lose your home.

Chapter 13 Solution

A Chapter 13 “adjustment of debts” would likely solve this dilemma. You’d have as much as 5 years to catch up on the $12,000 back payments. This would bring that impossible extra $1,000 per month down to a much more manageable $200 or so per month.

Why is it that you have that much more time in a Chapter 13 case? It’s because your mortgage lender is stopped from starting or continuing a foreclosure throughout the case’s 3 to 5 year lifetime. A lender can ask the bankruptcy court for an exception to this protection. But if your payment plan is feasible based on the information you present through the help of your lawyer, and if you make the payments required by your plan to catch up on the mortgage, then the court will likely continue the protection of your home.

A Property Tax Twist

Let’s now also assume $200 of that monthly $1,200 payment was for property taxes. So your 10 unpaid payments result in you being $2,000 behind on property taxes.

With most mortgage contracts falling behind on property taxes is a separate breach of the contract. It gives your mortgage lender an independent reason to foreclose (beyond being behind on your mortgage payments).

There’s a sensible reason for that. Eventually the county or other property tax creditor could itself foreclose on your home. The county or property tax creditor is usually legally ahead of your mortgage holder on the home’s title. So at least in theory your mortgage lender could be foreclosed off the property as well. This could leave the lender with absolutely nothing, something it absolutely won’t let happen.

That’s one of the reasons mortgage lenders are so aggressive in insisting that you catch up on the missed mortgage payments—including the property tax portion—so quickly.

Chapter 13 to the Rescue Again

This dilemma is solved by Chapter 13 neatly as well.

When you’re behind on property taxes, the county/property tax creditor is also stopped from foreclosing the home. Your home is protected from that creditor the same as from the mortgage lender. The county/property tax creditor inability to take action against the home protects the mortgage lender as well. Now the mortgage lender no longer needs to be afraid of a foreclosure by the county/property tax creditor. So the lender no longer has this separate justification for its own foreclosure.

Your Chapter 13 payment plan just needs to detail how you are feasibly going to catch up on the property taxes. Of course the plan needs to show that along with how you’re catching up on the mortgage arrearage itself.  And then you need to actually make the payments into that plan to demonstrate that you are actually going to catch up on both sets of arrearages as laid out in your plan.

Back to the Example

So let’s go back to our hypothetical example. You’re behind 10 payments of $200 in property taxes, or $2,000.  You are behind 10 payments of $1,000 in mortgage payments, or $10,000.

Your Chapter 13 plan could state that you would be paying $50 per month towards the $2,000 property tax arrearage. And you would be paying $170 per month towards the $10,000 mortgage arrearage. Let’s assume that you and your lawyer could demonstrate that you can afford to make these payments. If everything else was in order the bankruptcy court would then presumably approve the payment plan.

You’d be well on your way to getting current on your home and saving it permanently from foreclosure.

 

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