5 More Kinds of Chapter 13 Medicine for Saving Your Home

Chapter 13 is extraordinary in the number of distinct ways it can solve debt problems endangering your home. Here are five more ways beyond the five of the last blog.

6. Chapter 13 “super-discharge”: You can discharge (legally write off) some debts in a Chapter 13 case that you cannot in a Chapter 7 one. A couple of decades ago there were many more kinds of debts that could be discharged under Chapter 13, but Congress has whittled away at the list steadily. Now there are two left worth mentioning here. First, obligations arising out of divorce decrees dealing with the division of property and of debt (but NOT the part dealing with child/spousal support); and second, obligations involving “willful and malicious injury” to a person or property (but NOT related to driving while intoxicated). Both of these “super-discharged” types of debts are legally complicated, and definitely need to be addressed with the help of an experienced attorney. But in the right circumstances Chapter 13 can discharge one of your most serious debts, the same one that Chapter 7 would leave you owing.

7. Nondischargeable debts such as income taxes, back child/spousal support: Special debts which cannot be discharged in bankruptcy leave you at the mercy of those creditors just a few months after you file a Chapter 7 case. Those creditors—such as the IRS, and your ex-spouse and/or the state or local support enforcement authorities—often have the power to impose tax and support liens on your home, and potentially can even seize and sell your home to pay those liens. In contrast, a Chapter 13 protects you while you pay off those special debts in an organized plan, by preventing those liens from being placed on your home. By the time your Chapter 13 case is finished, those special debts are paid in full, never to threaten your home again.

8. “Statutory liens”: utility, ”mechanic’s”/”materialman’s,” and child support liens: If before filing bankruptcy you already have one of these involuntary liens imposed by law against your home, those liens would very likely survive a Chapter 7 bankruptcy. Because the “automatic stay” that prevents the enforcement of liens expires with the completion of a Chapter 7 case, these creditors would be able to threaten your home at that point. Instead, in a Chapter 13 the “automatic stay” continues throughout the three-to-five year case, again protecting your home while you satisfy the lien.

9. Judgment liens: Unlike the other nine items in this list, judgment liens can be avoided, or removed from your home’s title, in the same circumstances under Chapter 7 as in Chapter 13. A judgment lien can be removed if it “impairs” your homestead exemption, that is, if it encumbers the equity in your home that is protected by that exemption. The reason that I list it here is that this judgment lien avoidance can sometimes be put to extra good use in Chapter 13 when used in combination with one or more of these other 9, in a way which could not happen in Chapter 7. Let’s say for example that your home equity position would allow you to remove a judgment lien, but you are so far behind on your mortgage payments that you would lose your home to a foreclosure after finishing a Chapter 7 case. Your ability to remove that judgment lien from your home title would do you no good if you’re going to have your home foreclosed by your mortgage lender a few months later. It’s the Chapter 13’s ability to give you protected time to cure that mortgage arrears that gives practical value to your power to remove the judgment lien.

10. Preserve non-exempt equity: Home property values have declined so much in the last few years that most people thinking about bankruptcy do not have too much equity in their homes. That is, if there is any equity at all, it’s protected by the applicable homestead exemption, and therefore not at risk if you file a Chapter 7 case. But IF you DO have more value in your home than allowed under your homestead exemption, Chapter 13 can often protect it. You don’t run the risk of a Chapter 7 trustee seizing it to sell and pay the proceeds to your creditors. Instead, under Chapter 13 you can often either keep the home by paying those creditors gradually over the course of the up-to-5-year Chapter 13 case, or can sell the home yourself on your own schedule. Either way, Chapter 13 leaves you much more in control of the situation.

Each one of these ten Chapter 13 powers can solve a big problem so that you can keep your home. But they can have an especially dramatic impact when used in combination. In the next blog I’ll give some examples so that you see how these ten actually work, both separately and in combination.

 

Save Your Home with 5 Powerful Prescriptions Found in Your Chapter 13 Medicine Cabinet

Chapter 13 is often your best option for holding onto your home. That may be simply because it solves one of your major home debt problems, or instead because it solves a bunch of them all in one package.

 

If you’ve heard that Chapter 13 bankruptcy—the three-to-five year plan for “adjustment of debts”—is a good way to save your home, you’re probably thinking of a particular problem that you heard it solves. But the true beauty of Chapter 13 is in how many different kinds of problems it can handle all at the same time. So even if your home is being attacked from multiple directions, this bankruptcy option can often successfully defend against all those attacks.

But don’t get the false impression that if you are in danger of losing your house, Chapter 13 can necessarily save it. Even with all of the different ways it can help, this type of bankruptcy has its limits. Your situation has to fit for it to work.

I have a list of ten distinct ways that Chapter 13 can save your home, five covered in this blog and then five in the next one. This list of ten will give you a good sense of the multiple powers of Chapter 13, but also some sense of their limits.

1. Stretch out mortgage arrearage payments: This is the one you likely hear about most often: reduce what it costs you each month to catch up on your back mortgage payments by using up to five years to do so. This is in contrast to the much shorter time you’d have to catch up—likely a year or less—on the back payments, and the much, much higher monthly payments you’d have to pay to do so, if you had instead filed a Chapter 7 case.

2. Junior mortgage strip: Through Chapter 13—but not Chapter 7—you can “strip” a second or third mortgage lien off your home title. This often saves you hundreds of dollars monthly that you could instead pay to other more crucial obligations—or to your living expenses. And in the long run it can often save you thousands or tens of thousands of dollars. Very importantly, getting rid of some of the debt on your home can either create equity in your home where you did not have any, or at least make it less underwater than it had been.

3. Flexibility in buying more time for your home: There are all kinds of situations in which you need to buy time for your home, but not just the straightforward one for catching up on the mortgage arrearage. If you need to stop your house from being foreclosed to have time to sell it, or if you want to delay selling your home until two years from now when a child graduates from a local school, or when you qualify for retirement or expect some other definite change in your finances, Chapter 13 can often give you more control of the situation. Instead of being under the protection of the bankruptcy court for only the three months or so of a Chapter 7 case, you can potentially be protected for years under Chapter 13. Mind you we would have to formulate a plan to keep the mortgage creditor happy during this time. But the point is that there may well be creative ways to meet your goals without just being at the mercy of your lender, as you would pretty much be after, or even sometimes during, a Chapter 7 case.

4. Property taxes: When you fall behind on mortgage payments, at the same time you can also fall behind on your property taxes. Not paying a property tax payment on time is usually a separate breach of your contract with your mortgage lender, giving it another reason to foreclose on the property. Chapter 13 provides an excellent way to catch up on those taxes, while at the same time preventing the lender from using your missed tax payment as a reason to foreclose in the meantime. And because interest on property taxes is often higher than other secured debts, in your Chapter 13 Plan you may well be able to save money by paying off this tax debt earlier than other obligations.

5. Income tax liens: While I’m talking about taxes, Chapter 13 is also often the best way to satisfy an income tax lien which has attached to the title of your home. IRS and other possible state tax liens are generally not shielded by a homestead exemption, and have to be paid even if the underlying tax would otherwise have been discharged in bankruptcy. After a Chapter 7 case, you are left to fend against the tax authority on your own, facing the potential seizure of your home, with that used as intense leverage against you. In contrast, in Chapter 13 you are protected from such seizure, and as with property taxes can generally earmark payments towards the tax lien before most other creditors so that it gets paid off. It’s a much less worrisome and sensible way of taking care of this kind of scary debt.

These are the first five powerful ways that Chapter 13 can solve debt problems involving your home. Please come back in a couple days for the other five.

 

Ten Terrific Tools for Saving Your Home through Chapter 13--Part 2

Here are the other 5 powerful home-saving tools. Chapter 13 isn’t for everyone. But these tools, especially in combination, can often give you what you need to tackle and defeat your mortgage and other home-debt problems.

In my last blog I gave you the first five of ten distinct and significant ways that Chapter 13 can save your home. I’ll summarize those here briefly, and then give you the other five in more detail.

Chapter 13 enables you:

1.... to stretch out the amount of time you are given to catch up on missed mortgage payments, giving you as long as 5 years to do so.

2. ... to slash your other debt obligations so that you can afford your mortgage payments.

3.... to permanently prevent income tax liens, child and spousal support liens, and judgment liens from attaching to your home.

4.... to have the time you need to pay debts that cannot be discharged (legally written off) in bankruptcy, all the while being protected from those creditors messing with your home.

5.... to discharge debts owed to creditors which could have otherwise put liens on your home.

6.... to get out of paying all or some of your 2nd or 3rd mortgage ever again—IF the value of your home is no more than the balance of your 1st mortgage. This “stripping of junior mortgages” under Chapter 13 continues being used more and more as home property values continue to head downward in so many parts of the country.

7.... to take extra time to pay back property taxes, while protecting the home from tax and mortgage foreclosure. This is particularly important if you have a mortgage on your home. That’s because virtually all mortgages require you to keep current on the property taxes. So not only does Chapter 13 protect you from the property tax authority itself, more importantly it prevents your mortgage lender from using your property tax arrearage as a justification for foreclosing on your home.

8.... to favor many home-related debts—such as property taxes, support liens, utility and construction liens-- that you probably want to pay. You generally can’t get rid of these special kinds of liens on your home, but Chapter 13 allows—indeed requires—you to pay them in full before you pay anything to your other creditors. So in many situations your regular creditors’ loss is your home creditors’ gain, and thus your gain, too.

9.... to get rid of judgment liens in many situations, so that they no longer attach to your home. Although this can also be done in Chapter 7, it’s often all the more helpful in a Chapter 13 when used in combination with these other tools.

10.... to sell your house without the pressure of a foreclosure sale, either just a short time after filing the Chapter 13 case, or sometimes even three, four years later. You may need to or be willing to sell and downsize, but not until a kid finishes high school or you reach an anticipated retirement date. Chapter 13 may allow you to delay selling and curing part of your mortgage arrearage until then, allowing you to preserve your family home in the meantime.