Chapter 7 vs. Chapter 13 and Your Home Mortgage
Here are 7 ways filing a Chapter 7 case can help you deal with your home lender and 8 ways filing a Chapter 13 one can.
If you’re buying a home, your mortgage and other related debts are probably your biggest and most important ones. So it’s no surprise that the choice between filing a Chapter 7 “straight bankruptcy” and a Chapter 13 “adjustment of debts” so often turns on how each would handle your home-related debts. Here’s how each one would do so.
If you want to keep your home and are current on your mortgage, you’d just continue making the payments. If it’s been a struggle to keep current, doing so should become much easier. You’d stop paying all or most of your other debts when you file your Chapter 7 case. Then usually within just 3 or 4 months those other debts are discharged—permanently written off.
If you are just a few months behind on the mortgage, consider a “forbearance agreement” with your mortgage lender. You agree to pay an extra amount each month to catch up on the mortgage. But usually you have to catch up within a year or so. This works if your bankruptcy filing frees up enough money each month so that you can catch up fast enough. Of course you have to also keep current on your regular mortgage payments.
Chapter 7 can often also get rid of a judgment lien against your home. A creditor suing you and getting a judgment usually results in a judgment lien on your home’s title. Often such a lien can be “avoided,” taken off the title. Then the debt itself would almost always be discharged as well.
Most other kinds of liens—arising from taxes, child/spousal support, remodeling contractors, your homeowners association, for example—are not impacted by a Chapter 7 case. You will likely need to pay off the debt to get rid of the lien. Talk with your bankruptcy lawyer about such liens, because each kind has its own rules.
Filing a Chapter 7 case stops an ongoing foreclosure. If you are in the process of selling the home, the bankruptcy filing may buy enough time to close the sale. Be sure to discuss this in detail with your lawyer because the timing is crucial. A Chapter 7 case buys you only a limited amount of time. The Chapter 7 trustee may also have a say in what happens.
If you’ve decided to surrender your home, Chapter 7 can stop a foreclosure and buy you more time. That can enable you to be in your home without paying your mortgage longer. That could give you more time to save money for your upcoming rent payments and moving costs.
Surrendering your home without bankruptcy you could result in you owing a large “deficiency balance” on your mortgage. That’s the difference between the amount the home would sell for and the amount of the loan balances. Depending on your state’s laws, this could apply to your first and/or second mortgage. Any such “deficiency balance” would be discharged in your Chapter 7 case.
Assume again that you are current on your home mortgage and want to keep your home. You would just continue making the payments after filing your Chapter 13 case. Similar to Chapter 7, it’s usually much easier to keep current than before filing. That’s because Chapter 13 usually greatly reduces how much you pay on other debts.
If you’re not current, then Chapter 13 gives you much more time to catch up than under Chapter 7. You enter into a court-approved “plan” for getting current on the mortgage. The plan payments are based on your ability to pay. Your single monthly payment covers all or virtually all your other debts. In the meantime you are protected from all your creditors.
Chapter 13 can “strip” a second and/or third mortgage off your home. The value of your home must be less than the balance on your first mortgage. If you qualify, then you would no longer have to make that mortgage’s monthly payment at all. This would reduce your cost of keeping the home by that month each month. Plus your home would become that much less “under water”—you’d be that much closer to building equity in the home. This would make keeping the home more economically sensible.
You can “avoid” creditors’ judgment liens against your home just as in Chapter 7.
Unlike Chapter 7, Chapter 13 usually provides a helpful way to take care of most other kinds of liens. With income tax liens, you pay the underlying tax debt through the Chapter 13 plan. Then the IRS/state releases the tax lien at the completion of the case. Same process works with child/spousal support liens. These kinds of creditors ordinarily can be very aggressive, but under Chapter 13 they cannot take any collection action whatsoever while you pay off the underlying debts. You just need to fulfill your obligations under the payment plan, which again is based on how much you can realistic pay.
If you want to sell your home, Chapter 13 often gives you lots of flexibility about this. That’s true even if it’s several years later. For example, if you want to stay in your neighborhood until a child graduates from the local high school or leaves home, or if you need to wait until your home’s property value increases, that timing can often be built into your Chapter 13 plan.
Filing a Chapter 13 case can buy time by stopping a foreclosure sale, same as Chapter 7. This can buy you enough time to close on a sale of your home. Usually it can buy more time than a Chapter 7 can.
You can surrender a home during a Chapter 13 case, with more time flexibility than under Chapter 7. You may be able to delay the surrender longer. Then after the surrender, you would usually adjust your payment plan to account for the changes in your housing expenses.