Which is Better for Saving Your Home, Chapter 7 or 13?

Although either type of consumer bankruptcy will temporarily stop a foreclosure of your home, which is better for you in the long run?

 

The Simplistic Answer

If you are behind on your mortgage (and a lot of people in the Coachella Valley where I practice are), and definitely want to keep your home, then the simple guideline is: file a Chapter 7 “straight bankruptcy” case if that allows you to catch up on your arrears as fast as you need to, otherwise file a Chapter 13 “adjustment of debts” to give you more time.

A Truly Unique Decision

Many considerations can come into play in deciding whether a Chapter 7 or 13 is better for you overall. Even if we focus only on considerations related to saving your house, the decision still turns on your unique circumstances.

For example, following up on the “simplistic answer” stated above, a vague rule of thumb is that mortgage holders will tend to allow Chapter 7 debtors who are behind on their mortgage about a year to catch up. The mortgage holders will generally negotiate a “forbearance agreement” with large enough monthly catch-up payments (beyond the regular monthly mortgage payment amount) to bring the account current in a year or so.

But some specific mortgage holders may have a policy of allowing a longer or shorter period, and some may lengthen or shorten the length based on the particular facts.

The situation can be complicated by the reality that a Chapter 7 filing may make you eligible for a mortgage modification, but you may well not know until after you’ve filed the bankruptcy case and applied for the modification.

Another twist is that Chapter 13 allows for the potential “stripping” of a second mortgage, which Chapter 7 does not. If so, then even if you might have been able to cure the mortgage arrearage fast enough to pull off a Chapter 7 case, the tens of thousands of dollars saved through the “stripping” would very likely make Chapter 13 the better option.

Might Chapter 7 Be Enough?

So would—in your unique situation—a Chapter 7 buy you enough time, or would you instead need the much stronger medicine of Chapter 13?

Chapter 13 deservedly is known as being the home-saving bankruptcy option. But here are some examples where Chapter 7 may be enough to save your home:

  • you have a sale pending on your house but you’ve run out of time with a scheduled foreclosure;
  • you have some money coming to cure the arrearage but again have run out of time;
  • you are very close to getting a mortgage modification approved, or are more likely get it approved after discharging you debts in bankruptcy; or
  • you have decided to surrender the house but need a little more time to get into another home.

Chapter 13 Is Great If You Need It

Admittedly, these are relatively rare situations. Much more common is if your income went down through unemployment or a lower paying job, so that keeping up with the home mortgage payments became impossible. And then you regained that income, or maybe not all of it, and now owe a huge amount of missed mortgage payments, late charges and other fees. It does not take long for that arrearage amount to become so large that there’s no way that you could catch up on it within a year or so.

So Chapter 13 can give you as much as five years to catch up.

It can also buy you much more time to sell your home, until you are in a better time of year for home sales, have reached a point in your family’s life when moving makes more sense, or maybe even want to wait a couple of years for the home’s value to rise.

Chapter 13 can also be much better at dealing with other house-related debts, such as property taxes, second mortgages, and income tax, support or homeowners’ association liens.

Conclusion

There is much that goes into the decision whether to file a Chapter 7 or Chapter 13 case. This blog should convince you that, while both have advantages, you really need an experienced bankruptcy attorney to help you make the right choice for your unique circumstances.  This is especially true in the Central District of California (which includes Palm Springs, Cathedral City and Palm Desert, inter alia) where certain Bankruptcy Judges are downright hostile to Chapter 13s.


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