When a Chapter 7 “Straight Bankruptcy” Helps You Enough on Your Home

Posted by Kevin on February 11, 2019 under Bankruptcy Blog | Comments are off for this article

Chapter 13 Is a Powerful Package

If you want to keep your home but are behind on your mortgage payments, a Chapter 13 “adjustment of debts” is often what you need. It comes with an impressive set of tools to address many home debt problems. It gives you more time to catch up on the mortgage, may enable you to “strip” a second or third mortgage off your title, and gives you very helpful ways for dealing with property taxes, income tax liens, judgment liens, and such.

When Chapter 7 is Enough

But what if you have managed to fall only a few months behind on your mortgage, and could afford the payments if you just got relief from your other debts?

Or what if you aren’t even keeping the house, but do need a little more time to find another place to live?

Then you may not need a Chapter 13 case, and could save the extra time and cost that it would take compared to Chapter 7.

Buying Just Enough Time for What You Need

The “automatic stay”—the bankruptcy provision that stops virtually all actions by creditors against you or your property—applies to Chapter 7 just as it does to Chapter 13.  So the filing of a Chapter 7 case stops a foreclosure just as quickly as a Chapter 13 filing.

But Chapter 7 usually buys you much less time than a Chapter 13 could.

If you are not very far behind on your mortgage payment(s) and want to keep your home, when you file a Chapter 7 case your mortgage lenders will usually give you several months to catch up on your back payments. You must immediately start making your regular monthly payments, if you had not been making them, and must enter a strict schedule for catching up on the arrearage. In return the lender agrees to hold off foreclosing, as long as you make the payments as agreed.

Where do you get the money to make these extra payments?  By discharging your pre-petition debt in the Chapter 7, it could free up hundreds of dollars per month.  The key, then, is to make sure that you use that money to pay the mortgage arrearage and not spend it on other items.

If instead, you are not keeping the house but just need to have more time to save money for moving into a rental home, a well-timed Chapter 7 case will buy you more time in your house. During that time you don’t pay mortgage payments, enabling you to get together first and last month’s rent payment, any necessary security deposit and other moving costs.

The tough-to-answer question is how much extra time would a Chapter 7 filing give you. It mostly depends on how aggressive your mortgage company is about trying to start or restart the foreclosure efforts.  A pushy lender could, soon after you file your case, ask the bankruptcy court for “relief from the stay”—permission to start or restart the foreclosure process. If so, then your bankruptcy filing would buy you only an extra month or so.

Or on the other extreme, a mortgage lender could potentially take no action during the 3-4 months or so until your Chapter 7 case is finished. At that point the “automatic stay” protection expires, and the lender can start or restart the foreclosure. Or it may sit on its hands even longer.  Your bankruptcy attorney will likely have some experience in how aggressive your particular mortgage lender is under facts similar to yours.

Chapter 13 Basics-Why File?

Posted by Kevin on November 3, 2017 under Bankruptcy Blog | Be the First to Comment

In Chapter 7, debtors make no payments to their creditors but a Chapter 7 trustee can sell all non-exempt property and pay unsecured creditors.  The process is over in 4 months or so, and the debtor obtains a discharge of most of her debts.  In Chapter 13, however, debtors get to keep even their non-exempt property but must make monthly payments to the Chapter 13 trustee for a period of 36 to 60 months before they can get a discharge of most of their debts.

So, we are assuming that you are having trouble paying your bills.  You are contemplating bankruptcy.  Why would you choose to make payments for 3 to 5 years to get a discharge when you can pay nothing and get a discharge in 4 months.  Well, there are a number of reasons why prospective debtors pick Chapter 13.  In 2005, Bankruptcy Code was amended by a law referred to as BAPCPA.   BAPCPA adopted what is called the Means Test to determine if you could file under Chapter 7.  If your income based on family size exceeds the median for your State, you must pass the Means Test to file under Chapter 7.  The Means Test is based on IRS tests to determine how much a taxpayer can pay in back taxes.  So, if you are above median income and you fail the Means Test, you cannot file Chapter 7, and are be required to file under Chapter 13 if you otherwise qualify.

But, there are other reasons to file under Chapter 13 even if you pass the Means Test.  Say you own a home with significant equity.  In a Chapter 7, the trustee can sell your home and pay off your creditors.  In a Chapter 13, if you make all payments under a Plan confirmed by the Court, you can keep your home.  In addition, let’s say that you own a home but are in arrears on the mortgage.  In Chapter 13, you can pay off the arrears over the term of the Plan.  That could be up to 60 months.

Finally, say your house was worth $400,000 when you bought it, but after the mortgage crisis, it is only worth $250,000.  You owe $270,000 on a first mortgage and $50,000 on a second mortgage.  In this case, the collateral covers most of the first mortgage, but the second mortgage is completely unsecured.  In other words, if there was a foreclosure, the first mortgage holder would be paid a good amount of what it is owed, but the second mortgage holder would get nothing.  In Chapter 13 in our example, you can “strip off” that second mortgage and treat it as unsecured debt since there is no collateral to attach to that mortgage.  So, instead of making monthly payments of, say, $300 per month on the second, that creditor gets only a pro rata share of what is paid to the unsecured creditors.  If your plan payment is, say, $100 per month, then the second mortgage holder gets to share that $100 with the other unsecured creditors instead of getting $300 per month.  A substantial savings.   If you make all the payments, the second mortgage holder is required to release the mortgage lien of record.

In some cases, you are forced into Chapter 13, but that does not mean that Chapter 13 cannot provide some real benefits, especially to homeowners.  If you think Chapter 13 can help your situation, you should speak with an experienced bankruptcy attorney.  Chapter 13 is not a DIY project.