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Bankruptcy Stops a Property Tax Foreclosure

August 5th, 2019 at 7:00 am

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


Bankruptcy Stops a Property Tax Foreclosure

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

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

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

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

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

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

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

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

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

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

Chapter 7: Often Not Enough Help

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

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

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

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

Chapter 13: Buy More Time and Flexibility

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

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

Chapter 13: When Behind on Your Mortgage, Too

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

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

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

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

 

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.

 

Chapter 13 with a 2nd Mortgage, Property Taxes, or Income Tax Lien

December 4th, 2017 at 8:00 am

Chapter 13 can work much better than Chapter 7 if you have a second mortgage, get behind on property taxes, or have a tax lien on your home.


The last two blog posts were about situations in which a homeowner is current on the mortgage but has other debts on the home.  We showed how Chapter 7 “straight bankruptcy” can work well enough in the 6 debt situations we covered.

But Chapter 7 is often not the best option when you have a lien on your home. Chapter 13 comes with better tools for dealing with such debts against your home. Even if you’re current on the mortgage itself, these tools may make Chapter 13 highly worthwhile for you.

We’ll show how Chapter 13 helps in the same 6 debt situations covered in the last two blog posts about Chapter 7. We’ll cover the first 3 today and the other 3 in a couple days.

Here are the first 3 debt situations:

  1. Second or third mortgage
  2. Property tax
  3. Income tax lien recorded on your home

1. Second or Third Mortgage

Chapter 13 helps in two major ways with a second or third mortgage that aren’t available under Chapter 7.

First, you may have the option to “strip” a junior mortgage from your home’s title. If so, that debt would no longer be secured by your home. You would not have to pay your monthly 2nd/3rd mortgage payment. You would only pay on the 2nd/3rd mortgage balance during your Chapter 13 payment plan to the extent you had available funds to pay it, if at all. Then at the end of your case the remaining balance would be “discharged”—legally, permanently written off.

Your home qualifies for a 2nd mortgage “strip” if it is worth less than your first mortgage debt balance. Then Chapter 13 allows you to have the bankruptcy judge declare that the second mortgage debt is unsecured. After all, then there’s no remaining equity for the second mortgage. (This also works with a third mortgage if the home is worth less than the combination of the first and second mortgage debt amounts.)

The second way that Chapter 13 works better on a second or third mortgage is if you’re way behind on the monthly payments. Chapter 7 is fine if the lender will give you enough time to catch up at a reasonable pace. But second and third mortgage lenders usually have more exposure than first mortgage lenders. They have less equity protecting them. They could lose their entire debt by being foreclosed out by the first mortgage lender. So second/third mortgage lenders tend to be more demanding and less flexible about catch-up payments.

Chapter 13 is a great way to force them to give you more time—up to 5 years if needed. Plus, your Chapter 13 catch-up payments can work around other important debts that you need to pay.

2. Property Tax

If you fall behind on your home’s property taxes, your mortgage lender will become quite unhappy very quickly. Even if you’re current on your mortgage, falling behind on property taxes is a separate basis for your lender’s foreclosure. It usually takes years of being behind before your property tax authority itself would do a tax foreclosure. But your mortgage lender gets very nervous because if that were to ever happen it would lose rights to the property as well. Plus, your lender sees falling behind on property taxes as a sign you’re not financially responsible or capable. For these reasons it’s a breach of your mortgage contract.

After falling behind on property taxes it’s difficult to catch up in the midst of your other financial pressures. Chapter 13 can help tremendously through a combination of two benefits. First, you get up to 5 years to catch up, making doing so more feasible. Second, you are protected from BOTH a tax foreclosure and your lender’s foreclosure. So using Chapter 13 to bring our property taxes current is often the best way to do so.

3. Income Tax Lien

Chapter 13 can be the best way to deal with an income tax lien on your home, in various scenarios.

First, consider if there’s no equity in the home covering that tax lien and the tax itself is dischargeable. (There’s no equity because the mortgage and any other prior liens total more than the home’s value. The tax itself is discharged usually because it’s old enough.) If so, then in Chapter 13 that tax is treated as a general unsecured debt. It’s lumped in with your other general unsecured debts, usually not increasing how much you pay into your plan.

Second, if equity in your home covers the full amount of the tax lien, Chapter 13 provides a flexible and safe way to pay the tax. The IRS/state loses most of its scary leverage over you. You simply arrange to pay the tax (and interest) over the 3-to-5-year life of your Chapter 13 payment plan. You protect your home while fitting that tax obligation into your budget and around any other urgent debts.

Third, if equity in your home covers a portion of the tax lien, you only pay that portion as a secured debt. And as just stated, you pay this through your plan safely and flexibly. This is much better than being leveraged into paying the full amount at the risk of losing your home.

 

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.)

 

Buy Time to Get Current on Home Property Taxes

October 23rd, 2017 at 7:00 am

Falling behind on home’s property taxes creates a special problem. The tax collector will likely be much less pushy than your mortgage lender. 


Falling Behind on Property Taxes

If you have a mortgage on your home you can fall behind on your property taxes two ways.

First, most likely you’re paying your taxes as a portion of what you send monthly to your mortgage lender. When you don’t pay your monthly payment to your lender, you fall behind on both the mortgage and your taxes.

Second, if you’re paying your taxes directly to the county or other tax agency, you fall behind by not paying when it’s due.

The Consequences, Short Term and Long Term

Not paying your property tax results in losing your home through a property tax foreclosure.  But in most parts of the country that doesn’t happen for a number of years past the due date. For quite a while you’ll likely just get occasional notices from the county/tax agency reminding you that you’re late.

It’s not the county/tax agency who’s likely to be making the most noise when you don’t pay your property taxes. It’s your mortgage lender.

Why Your Mortgage Lender Gets Upset

With virtually all mortgage contracts, falling behind on property taxes puts you in default on the mortgage itself. That means that even if you are current on the mortgage payments your lender could foreclose on your home just because you’re behind on the taxes.

The reason for this is that you owing back property taxes is quite dangerous for your lender. If the county/tax agency would foreclose on your home your lender (and other lienholders) would lose its legal rights to your home.  That would leave the lender without any collateral at all on your mortgage loan. It risks getting paid nothing on the loan.

Even if a tax foreclosure would not happen for a few years, not paying property taxes is seen as an indication that you can’t afford the home.  It’s a big warning sign for the lender

To prevent a tax foreclosure from happening your lender will almost certainly pay your past-due property taxes. The mortgage contract allows it to do so. As you can imagine it doesn’t like to put out money like this. So it then aggressively comes after you to pay it back, and quickly. If you don’t pay, your lender will likely start a home foreclosure. That’s especially true if you’ve also fallen behind on your mortgage payments.

If You Can Fix This Fast

If you can catch up quickly on the property taxes you may not need bankruptcy help. But presumably you fell behind because of some serious financial challenges.

Filing a Chapter 7 “straight bankruptcy” case can sometimes provide enough help. But that’s only if your bankruptcy filing improves your cash flow so much that you’d have enough extra money to catch up on the property taxes fast enough to satisfy your lender.

As you work with your bankruptcy lawyer on your budget, he or she will discuss this with you. It’ll likely be a key part of your conversation about whether to file a Chapter 7 or Chapter 13 case.

With Chapter 13 You Buy Lots of Time

If you can’t catch up fast enough to satisfy your mortgage lender, filing a Chapter 13 “adjustment of debts” case requires 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 first big benefit to you is that this long period of time reduces the monthly catch-up payment amount. Catching up becomes more affordable, making it more likely.

Another benefit is that you’re protected from your lender during this catch-up time. It can’t enforce its requirement that you be current on property taxes. As long as you keep your commitments under the Chapter 13 plan it won’t get permission to take any action against you or your home. The lender is protected because the county/tax agency is itself is prevented from taking any action. It can’t do a tax foreclosure, which benefits both you and your lender.

The third benefit of Chapter 13 is that it solves your property tax problem long term. You won’t fall behind again because your formal budget includes that expense. Plus you’re required to keep current as a condition of your payment plan. Your lender would likely be able to get permission to start a foreclosure if you don’t pay ongoing tax payments. But again, there should be room in your budget to keep current on these.

Then at the end of your Chapter 13 case you would be current on the property taxes. You’d have paid off the original unpaid tax and any accrued interest. Plus you’d have kept current on each new year of taxes because it’ll be in your realistic budget.  Your property tax problem will be resolved.

 

Catching up on Property Taxes on Other Than Your Home

August 14th, 2017 at 7:00 am

If behind on property taxes on property that isn’t your home, either Chapter 7 or Chapter 13 may buy you the time to save this property. 

 

For most people who are behind on property taxes on their real estate, that real estate is their home. And they have a mortgage on that real estate. See our last blog post about catching up on your property taxes on your mortgaged home.

But you may own real estate that isn’t your home, on which you are behind on property taxes. This comes up in a number of scenarios. Today we’ll look at mortgaged investment property on which you’ve fallen behind on property taxes.

First Problem—The Unhappy Mortgage Lender

Again, see our last blog post about why mortgage lenders get very concerned when borrowers fall behind on property taxes. What we said there about mortgaged homes applies as well to investment and other types of real estate.

Briefly, being behind on property taxes is virtually always a breach of your agreement with the mortgage lender. That’s because the property tax is “senior” to the mortgage, meaning a property tax foreclosure would wipe out the mortgage lender’s lien on the property. That’s very dangerous for the lender, so it acts aggressively to get you current on the taxes. This may include the lender paying the tax and then coming after you to pay it back. And if you don’t the lender can start its own foreclosure, even if you’re current on the mortgage itself.

Bankruptcy can solve this problem, one of two ways. A Chapter 7 case “discharges” your other debts so that you can afford to bring your property tax current. And if that doesn’t happen fast enough, a Chapter 13 case buys you more time, up to 5 years. Your court-approved payment plan gives you an affordable, flexible, and protected way to accomplish this.

Second Problem—Justifying Keeping the Property

The bankruptcy system has no trouble helping you pay debts related to your home. Other real estate can get trickier.

If you have investment property, you may need to justify that it’s financially sensible to keep that property. Specifically, you’ll likely have to justify spending money to catch up on the taxes.

For example, is the real estate worth more than you owe on it, including the taxes? If so, that more easily justifies paying the taxes to save your equity in the property.

Also, does the investment real estate generate a positive cash flow? If so, that also more easily justifies paying the taxes to preserve this positive cash flow.

If your investment property has negative equity and/or negative cash flow, it’s hard to justify keeping the property.

Why Does the Bankruptcy System Care?

It cares for budgeting and liquidation purposes.

To go through a Chapter 7 case you must pass the “means test.” That essentially requires showing that you don’t have the means to pay a meaningful amount to your general unsecured creditors. And that in turn usually requires showing a detailed budget. That budget includes a list of allowed expenses. Depending on the circumstances (including the equity/cash flow issues touched on above), you may not be able to include expenses on a financially unnecessary or unjustifiable investment property.

Under Chapter 13 case you pay what you can afford to pay to your creditors through a 3-to-5-year payment plan. As under Chapter 7, you have to justify paying property taxes on a property that isn’t your home. If that property is generating income and helping to pay the other creditors, putting money into that property to pay its taxes is more defensible. If the property is a cash drain justifying putting “good money after bad” into it would be hard to defend.

As for the liquidation issue, in a Chapter 7 case the bankruptcy trustee can liquidate anything that isn’t protected. The protection is mostly in the form of exemptions—property you’re allowed to keep. The Chapter 7 trustee will be inclined to take and liquidate your investment property if it will generate any cash for your other creditors.

Chapter 13 provides a way for you to protect assets you could otherwise lose in a Chapter 7 case. Essentially you pay more into your payment plan to cover the amount of money would have gone to your creditors in a liquidation of your investment property. That may be feasible, depending on your cash flow and on the liquidation value of that property.

Conclusion

Notice that there are some potential Catch-22s when dealing with investment real estate on which you owe property taxes. For example, having equity in the property makes it more prone to liquidation under Chapter 7, but having no equity makes keeping it and curing the taxes harder to justify. Under Chapter 13, a positive cash flow from the investment is important to justify catching up on the taxes. But there’s a good chance you don’t currently have a positive cash flow but rather are just expecting that to happen when certain things fall into place.

So figuring out how to deal with an investment property with owed taxes involves some careful financial and legal judgment calls. This is exactly the kind of situation you need the good counsel of savvy and conscientious bankruptcy lawyer.

 

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 Property Taxes through Chapter 13

July 13th, 2016 at 7:00 am

If you are behind on property taxes on your home, Chapter 7 often doesn’t give you enough time to catch up. But Chapter 13 likely would.


Today we cover the 4th one of the 10 ways we listed recently that Chapter 13 helps you keep your home. When we gave the list we wrote:

4. Get Current on Past Due Property Taxes

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

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

The Example

Assume that you own a home worth $225,000, with a mortgage loan balance of $200,000. Your property taxes are $1,850 per year, paid directly to your county tax assessor instead of through your mortgage holder.

For years you paid the yearly property taxes out of a combination of income tax refunds and scraped together savings. And you took cash advances on credit cards whenever there wasn’t enough money.

Then a couple of years ago you lost your job and didn’t find a new one for several months. Plus the new one is at a lower salary. So last year when it was time to pay the property taxes you’d already maxed out on credit. You couldn’t pay the $1,850 in taxes. With the payments due every month on the credit cards, the mortgage, and other bills, you couldn’t pay the property taxes this year again. So now you’re behind $3,700 plus interest.

Your mortgage lender has been after you for not paying the property taxes. You’ve managed to stay current on the mortgage, but occasionally did so paying it also through credit cards when you still had some credit available on them. The mortgage lender is now threatening to pay the property taxes and foreclose on the house because of your failure to keep current on the taxes. You’re now justifiably afraid that you’re going to lose your home.

Chapter 7 Won’t Likely Cure the Dilemma

Filing a Chapter 7 “straight bankruptcy” might help but, because of how property taxes work, possibly not help enough.

That’s because most mortgage lenders consider nonpayment of property taxes a breach of your contract with them. And that’s because the property tax creditor usually has a legal right to foreclose the property out from under them! So your lender will itself likely pay your property taxes at some point to avoid that from happening. The mortgage contract almost always allows them to do this.

Then your mortgage lender will put pressure on you to pay off the money it fronted for the taxes. It will most likely threaten to foreclose on your home to make you pay. And it will most likely follow through on that threat if you don’t pay up.

When Chapter 7 Might Help

Filing a Chapter 7 case CAN sometimes solve this problem. But only if that bankruptcy filing improves your cash flow enough so that you would have sufficient extra money to catch up on the property taxes quickly enough.

How fast? Fast enough to keep your mortgage lender happy.

The problem is not usually with the county or whatever tax authority you owe directly on the property taxes. In most places a tax foreclosure by the county or other tax authority doesn’t happen until you are behind on property taxes a number of years.

Rather the urgency is with your mortgage lender. It would prefer not to put up the money for the property taxes instead of having you do it. And then once your lender does pay the taxes, it wants you to bring the account current quickly.   

Going back to our example, if you’re behind two years of taxes, amounting to $3,700 plus ongoing interest, you and your bankruptcy lawyer would have to see how much you could afford to pay towards that after your Chapter 7 case has “discharged” (legally written off) all or most of the rest of your debts. If you can keep the property tax authority and your lender happy by catching up fast enough, Chapter 7 will have solved your problem. Your lawyer will be able to make the required calculations to advise you about this in advance of deciding which way to go.

The Additional Help of Chapter 13 “Adjustment of Debts”

If you CAN’T satisfy your mortgage lender fast enough, Chapter 13 would force your lender to let you have more time. In most cases you’d have between 3 and 5 years to catch up on the property taxes.

Stretching out the catch-up period that long reduces how much you have to pay monthly towards the property taxes. That makes catching up easier. Especially if you are far behind, it could turn an otherwise impossible situation into a workable one. Catching up the $3,700 property tax arrearage over the course of a few months could very well be impossible for you. Stretching that out over 3 or 4 or 5 years (monthly payments of about $75-$100) should be much more feasible.

 

Dealing with Unpaid Property Taxes on Your Home

May 18th, 2016 at 7:00 am

Catching up on property taxes benefits both you and your mortgage lender. Chapter 13 helps you pull this off under much less pressure.

 

Slipping Behind on Property Taxes

If you’ve fallen behind on your mortgage payments, you’ve likely also fallen behind on your property taxes.

You may be required to pay those taxes as part of your mortgage payment. So not paying the mortgage automatically means you’re not paying the property taxes.

Or you may be supposed to pay the property taxes directly, separate from your mortgage. So you’ve not paid the property taxes because the mortgage lender is much quicker to complain and makes more noise if you don’t pay the mortgage.  So you pay that as much as you can instead of the property taxes.

Either way you fall behind on the property taxes. So how to solve this problem?

Some Help from Chapter 7 “Straight Bankruptcy”

Two blog posts ago we explained how Chapter 7 can enable people to keep their home as long as they can catch up on their unpaid mortgage payments within a few months after filing their bankruptcy case.

That’s all the harder if you are also behind on property taxes.

But in some situations, the filing of a Chapter 7 case allows a homeowner to stop paying a lot of money each month to other creditors, freeing that money to be paid towards the unpaid mortgage and property taxes.

Your Mortgage Lender’s Harsh Leverage

The problem is the impatience of your mortgage lender.

Usually a foreclosure by a property tax agency does not happen until a number of years after you don’t pay a property tax bill. So you’d think you’d have years to get current.

Maybe so if you own the property free and clear of a mortgage.

But not if you have a mortgage. In the reams of paperwork you signed when you got the mortgage you promised your mortgage lender that you would always keep current on the property taxes. So if you don’t, that’s a breach of your mortgage loan. It gives your lender a separate justification for foreclosing on your home, regardless whether or not you are current on the mortgage payments themselves.

Chapter 13 “Adjustment of Debts” Buys Much More Time

A Chapter 13 payment plan gives you time to catch up on your property taxes. And it keeps your mortgage lender off your back while you do so.

Our last blog post showed how Chapter 13 can usually give you as long as 5 years to catch up on missed mortgage payments. Same thing with back property taxes. And same thing if you are behind on both.

Stretching out the catch-up period that long reduces how much you have to pay monthly, on the property taxes or on both the property taxes and the mortgage. That makes catching up easier. If you are far behind, it may make the otherwise impossible become possible.

Chapter 13 Protects Your Home

Chapter 13 cases usually last 3 to 5 years. If you follow the payment plan that you and your lawyer propose and the bankruptcy judge approves, throughout that time you and your home are protected from foreclosure and other collection activity.

This protection applies both to the property tax creditor and to your mortgage lender. You do need to keep current on new tax years and on new mortgage payments as they come due. And you do need to make your “plan payments” so that you are making progress on the past due property taxes (and mortgage payments, if you’re behind on them, too). Or you could lose this protection and this opportunity to get current over time.

Flexibility under Chapter 13

Although Chapter 13 gives you as long as 5 years to catch up on your property taxes, often you’d be able to pay your back property taxes more quickly. That’s because in your Chapter 13 plan you can usually delay paying other creditors while you first catch up on the property taxes. That’s helpful because property taxes tend to have high interest. Besides saving you on interest, you build equity in your home, and satisfy your mortgage lender more quickly.

Chapter 13 is also a particularly good option if you have other liens against the home, such as a second mortgage, or liens for income taxes, for child or spousal support, for a judgment, or just about any other lien. More about those in our upcoming blog posts.

 

A Fresh Start with Unpaid Property Taxes on Your Home

February 3rd, 2016 at 8:00 am

Falling behind on property taxes is dangerous, and scares your mortgage lender. Bankruptcy can help you deal with both.

 

Is Chapter 7 “Straight Bankruptcy” Enough Help?

It possibly can give you enough of a fresh start with your other debts so that you can catch up on your property taxes. But doing so while keeping your mortgage lender also satisfied is difficult to pull off.

If you’ve fallen behind on your property taxes, sometimes just writing off your other debts would give you enough financial breathing space so that you could catch up on your property taxes. Tax foreclosures usually don’t happen until you’re years behind, so you may have a fair amount of time to get current.

So find out from your attorney how much time you would have to catch up. Some tax creditors will set up a monthly payment plan with you. Find out if that would be available to you and if you could afford the payments once you discharged (wrote off) your other debts.

If so, a Chapter 7 “straight bankruptcy” might give you the help you need.

Frightening Your Mortgage Lender

But the biggest practical problem in this is usually your mortgage lender. Even if losing your home from a property tax foreclosure is years away, falling behind on your property taxes gets your mortgage lender excited, in a bad way. Enough so that it threatens to or starts its own foreclosure, usually a much faster procedure for losing your home.

Your mortgage lender gets anxious if you fall behind on property taxes because:

  • The lien that the property tax creditor has on your home comes ahead of the mortgage lender’s lien. This means that your lender would lose its own rights to your home in the event of a property tax foreclosure. That’s your lender’s worst nightmare and it will do anything to prevent that.
  • Your contract with your mortgage lender requires you to keep current on the property taxes. So you are in violation of that contract by falling behind on the taxes, even if you are current on the mortgage payments.
  • Many homeowners’ monthly mortgage payment includes an additional “escrow” portion for property taxes. So you may well be behind on property taxes because you’ve also fallen behind on the mortgage payments.
  • That “escrow” extra monthly payment often also includes money for your homeowner’s insurance. Falling behind on that REALLY scares your lender because it could lose its collateral overnight in a fire or other disaster. Your lender would then pay out of its own pocket for its own version of insurance—usually much more expensive than what you were paying—and tack that insurance premium onto your bill. That puts you even further behind on your mortgage.
  • Finally, even if you are current on your insurance and your mortgage payments because you pay those separately and have managed to keep up on those, your lender considers you falling behind on property taxes as a strong sign that you are not financially responsible.

Chapter 13 “Adjustment of Debts” Buys More Time, Protects Your Home

A Chapter 13 “adjustment of debts” bankruptcy solves both your property tax problem and your mortgage lender one.

You will very likely be given as much as 5 years to catch-up on your property taxes. This reduces how much you have to pay monthly, making it more feasible. Throughout that time the tax creditor would not be able to foreclose or take any other collection activity.

Under Chapter 13, even though you’d have as long as 5 years, there’s a good chance you’d actually be able to pay your back property taxes more quickly than after a Chapter 7 case. That’s because your Chapter 13 plan can usually delay paying other important creditors, such as the IRS or a spousal support enforcement agency, while you first catch up on the property taxes. Besides saving you on interest, that will make your mortgage lender less anxious.

As for solving your mortgage lender problem, Chapter 13 forces your lender to not take any action against you as long as you catch up on the property taxes as your court-approved plan allows you to do.

And if you are also behind on your mortgage payments, Chapter 13 is a particularly good option. You are usually allowed to stretch out your mortgage catch-up payments for up to 5 years as well. If you have a second or third mortgage, you may be able to “strip” it from your home’s title, saving you money each month and long term. Other liens—for income taxes, for example—can often be dealt with favorably. And throughout the life of the Chapter 13 case, as long as you are meeting the terms of your payment plan, you and your home will be protected from foreclosure or any other collection efforts by your mortgage company.

 

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