Saving Your Home Through Chapter 7 and Chapter 13 in Three Scenarios
Posted by Kevin on June 28, 2017 under Bankruptcy Blog | 
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Here are 3 scenarios where a debtor tries to save his or her home. When is Chapter 7 “straight bankruptcy” enough, and when do you need Chapter 13 “adjustment of debts”?
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.
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.
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 arrearages. 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 arrearages 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 arrearages. If lender is inflexible about giving you more time to catch up, a Chapter 13 case forces them to accept a much longer period to do so—three to five years.
Scenario #3. Many Payments Behind on Your Mortgage(s):
Chapter 7: Not helpful here. Buys at best only two to three months or so. Also, no possibility of “stripping”a 2nd or 3rd mortgage.
Chapter 13: Assumes that you can at least make the regular mortgage payment consistently, along with the arrearages catch-up payments. As stated above, gives you up to five years to pay off the mortgage arrearages, Your home is protected from foreclosure as long as you maintain the agreed Chapter 13 Plan and mortgage payments. 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.
In my 30+ years of experience as a bankruptcy attorney, have seen Scenario #1 only once (was a close friend and he is still in his home). Usually see Scenario #3 because most debtors do not seek counsel until they are really “in the hole”. Be smart. When things start to go south, call an experienced bankruptcy attorney to learn your options.
