Chapter 13’s Tools for Your Home Mortgage
April 10, 2017
Chapter 13 gives you many tools to help you manage your home mortgage.
Chapter 7 vs. Chapter 13 in General
Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” give you two very different ways of attacking your debts. This includes your home mortgage.
Chapter 7 gets rid of most debts so that you can have a quick fresh start. By quick we mean within about a hundred days. If you are current, or close, on your home mortgage, Chapter 7 can help you afford that monthly payment.
Chapter 13 involves a flexible payment plan that’s especially helpful with debts you can’t write off, or “discharge.” So it can be much better if you own income taxes, child or spousal support, or student loans, for example. Chapter 13 can also be incredibly helpful with debts you don’t WANT to discharge, like your home mortgage. Chapter 13 protects you for three to five years while to deal with debts you can’t or don’t want to discharge. You then get a discharge of the debts that you didn’t pay, catch up on and/or partially pay. Especially if you have fallen behind on your mortgage and are at risk of losing your home to foreclosure, Chapter 13 is often the better option.
Saving Your Home from Foreclosure
Chapter 13 stops a foreclosure if you have one pending. And it often stops one from starting if you are on the brink of that happening. You then have 3 to 5 years to catch up on your missed mortgage payments. Having such a long time to catch up makes it easier and more likely that you can and do actually do end up catching up and saving your home.
Usually you catch up by chipping away at the arrearage month-by-month, but not necessarily. Chapter 13 can be very flexible. You may be allowed to catch up in other ways. For example, your payment plan may allow you to sell or refinance your home a few years after filing the case. This can give you some valuable flexibility, such as enabling you to put off catch-up payments until then. This can also give you time to build up more equity for the sale/refinancing. It may allow you to stay in your home for a crucial length of time. For example, it can be a great way to be able to stay within a local school district another couple years until a child graduates from high school.
A second or third mortgage “strip” is a potential benefit only available under Chapter 13. If your home is worth no more than your first mortgage, the second mortgage can be removed from your home’s title. If so, you immediately stop paying on that junior mortgage, significantly and permanently reducing the monthly cost of keeping your home Stripping off the junior mortgage also gets you closer to actually building equity. (To do a third mortgage “strip,” the home can’t be worth more than the amount of the first and second mortgage balances combined.)
If you’ve fallen behind on your property taxes, Chapter 13 also gives you more time to catch up on it. As with your mortgage lender, during your catch-up period, your home is protected from the taxing authority’s foreclosure. You are also protected from your mortgage lender itself foreclosing for the reason that you not having paid those taxes.
Bankruptcy allows you to remove most judgment liens from your home title permanently. You may pay a part of the underlying debt (that resulted in the judgment) through your Chapter 13 plan. But most of the time that individual debt does not increase the amount you are required to pay. And sometimes these debts receive nothing at all. Then at the end of your case whatever amount is still unpaid is all discharged. Judgment lien removal is also available in a Chapter 7 case, but can be especially valuable in Chapter 13 in combination with the other tools.
Chapter 13 also deals relatively well with a lien on your home on debt that bankruptcy does not discharge. So if you have a lien based on child/spousal support arrearage or relatively recent income taxes, you pay off that debt through your Chapter 13 plan, while being protected from collection efforts of these creditors. And then at the end of your case, with the debt paid, the lien is released from your home’s title.