Saving Your Home Through Chapter 7 and Chapter 13 in Three Scenarios
Jan. 27, 2014
Here are 3 common scenarios. When is Chapter 7 “straight bankruptcy” enough, and when do you need Chapter 13 “adjustment of debts”?
Assuming that your most important goal is saving your home, here’s how each kind of bankruptcy helps with that goal.
Scenario #1: Current on Your Home Mortgage(s), Behind on Other Debts
Chapter 7: Would likely discharge (legally write off) most if not all of your other debts, freeing up cash flow so that you can make your house payments. Stops those other debts from turning into judgments and liens against your home. May also allow you not to fall behind on other obligations—income taxes, support payment, utility bills—which could also otherwise turn into liens against your home.
Chapter 13: Same benefits as Chapter 7, plus often a better way to deal with many other special debts, such as income taxes, back support payments, and vehicle loans. May be able to “strip” (permanently get rid of) a 2nd or 3rd mortgage, so that you would not have to make that monthly payment, and paying little or nothing on the balance during the case and then discharging any remaining balance at the successful completion of your case. Is better at protecting assets than Chapter 7, if you either have more equity in your home than your homestead exemption allows or have any other asset(s) not protected by other property exemptions.
Scenario #2. Not Current on Home Mortgage(s) but Only a Few Payments Behind & No Pending Foreclosure
Chapter 7: May buy you enough time to get current on your mortgage, if you’ve slipped only two or three payments behind. Most mortgage companies and their servicers (the people you actually interact with) will agree to give you several months—generally up to a year—to catch up on your mortgage arrearage. Generally called a “forbearance agreement”—lender agrees to “forbear” from foreclosing as long as you make the agreed payments. Works only if you have an unusual source of money (a generous relative or a pending legal settlement that’s exempt from the other creditors), or if filing Chapter 7 will stop enough money going to other creditors so you will have enough monthly cash flow to pay off the mortgage arrearage quickly.
Chapter 13: Even if only a few thousand dollars behind on your mortgage, you may not have enough extra money each month after filing a Chapter 7 case to catch up quickly on that mortgage arrearage. Lenders seldom voluntarily give you more than about a year to catch up, but if you file a Chapter 13 case that forces them to accept a much longer period to do so—three to five years. That greatly reduces what you need to pay towards the arrears every month, often making it affordable.
Scenario #3. Many Payments Behind on Your Mortgage(s):
Chapter 7: Not helpful here unless you have some extraordinary means for paying off the large mortgage arrears. Buys only a few weeks of time, or at most three months or so (if the mortgage lender chooses to do nothing while your bankruptcy case is pending). Also, no possibility of “stripping”a 2nd or 3rd mortgage.
Chapter 13: As stated above, gives you up to five years to pay off the mortgage arrearage, all of which time your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan payments. Assumes that you can at least make the regular mortgage payment consistently, along with the arrearage catch-up payment. Does not enable you to reduce the first mortgage payment amount, although in some situations you may be able to “strip” your 2nd or 3rd mortgage.
CAUTION: these are just the very basic advantages and disadvantages. There are lots of other twists and turns which will likely apply to your unique scenario. Be sure to meet with an attorney for the best game plan for you to meet your goals.