Chapter 13 Protects Your Home from Your Mortgage Lender(s) and All Lienholders
June 8, 2015
Here are 8 ways the “adjustment of debts” version of consumer bankruptcy can help you save your home.
Many strong powers come with filing a Chapter 13 case.
If you are behind on your mortgage, you will likely have the whole 3-to-5-year length of your Chapter 13 case to catch up on your missed payments. The longer you have to catch up the less it will cost each month to do so. Indeed you may want to and may be permitted to purposely stay in your payment plan longer to make it easier on your monthly budget.
If you are current on your mortgage, most of the time you will be allowed to keep making payments directly to your mortgage holder. The bankruptcy system puts a high priority on home mortgage payments (particularly your first mortgage), so almost always your Chapter 13 plan will be structured to pay your mortgage ahead of and usually instead of most other creditors, making it easier to keep current.
If you have a second mortgage, that mortgage may be able to be “stripped” off your home’s title so that you won’t have to pay it, or most of it. This is possible only if the home is worth no more than the balance owed on the first mortgage (plus any liens prior to the second mortgage, such as for property taxes and possibly homeowner association dues. Second (or third) mortgage “stripping” can only be done in Chapter 13, not Chapter 7. Besides significantly reducing what it would cost you monthly for your home, with the second (or third) mortgage “stripped” off your title you would be that much closer to building some equity in your home.
If you are behind on homeowner association dues or assessments, these special creditors usually have aggressive collection methods available to them against you. But these creditor actions are stopped by Chapter 13, giving you breathing space so that you can get current through payments earmarked your homeowner association through your plan.
If you are behind on your property taxes, same thing. The collection actions of the county or other property tax agency are put on hold while the back taxes are paid through your Chapter 13 plan. Your mortgage lender also sees that you are taking care of this responsibility, taking away this separate basis for it to foreclose or demand immediate payment of the taxes.
If you have a judgment lien on your home, often it can be “voided”—the lien negated and released, and the underlying debt written off. This can happen if the amount of equity that you have in your home, without accounting for the judgment lien, is no more than the amount of your homestead exemption. The debt itself is treated as an unsecured debt (not secured by a lien on your home) and is paid whatever percentage all your unsecured creditors receive through your Chapter 13 plan. Usually this does not increase the total you end up paying to the creditors, but instead merely shifts the amount each of your creditors gets paid (if they get paid anything at all).
If you have an income tax lien, Chapter 7 “straight bankruptcy” does not have an good way to deal with an income tax secured through a recorded tax lien. Chapter 13 has an efficient and effective way. Whether the tax lien is on a tax which can or cannot be discharged (written off), your Chapter 13 plan will arrange to pay only those taxes that must be paid during the life of your case. So at the end of your case you will have paid all necessary taxes (but no more) and the tax lien will be released.
If you have a child or spousal support lien, this is another situation where Chapter 7 cannot help but Chapter 13 can. When you file your Chapter 13 case your ex-spouse or support enforcement agency is prevented from enforcing the lien and you’ll have the length of your case to pay the support arrearage. So by the end of the case you would be current on support and any lien would be released.