Here’s an example of how Chapter 13 can allow you to hold onto your home but then change your mind about it later.
Our last blog post introduced the option of saving your home through Chapter 13, while keeping open the possibility of surrendering the home later if your circumstances change.
Advantage of Keeping Your Options Open
Sometimes it’s hard to know whether hanging onto your home is worth the money and effort. For example, if you were about $10,000 behind on your mortgage and property taxes, and could get that money by borrowing from a relative or from a retirement account, would that be worthwhile? What if the home had no equity—the mortgage loan balance was higher than the value of the home? What if you were not confident you could afford to pay back that $10,000 loan? What if the main current reason to stay in the home now would no longer apply in a couple years?
If you filed a Chapter 7 “straight bankruptcy” case you would have to make that decision quite quickly. If your mortgage lender was in the process of foreclosing your home, or was threatening to do so, a Chapter 7 filing protects your home for only about 3 months, sometimes less. You effectively have about that much time to decide whether to keep your home, and to figure out how.
And what if you don’t have any means to come up with that $10,000—no rich relative or retirement account? What if you simply don’t have the means, even after reducing your debts as much as possible through Chapter 7, to catch up on the mortgage as fast as the mortgage lender demands?
Chapter 13 Solution
Not only does Chapter 13 give you some remarkable tools for saving your home. It often also gives you the option of later changing your mind and surrendering the home. We’ll illustrate this in a practical way within the fact scenario presented in our last blog post. Please look at that scenario before reading further here.
Going back to the hypothetical facts presented last time, you and your spouse decide to file a Chapter 13 case. You really want to hang onto your home. Your attorney has advised you that filing a Chapter 7 case would not get you there.
It’s especially important for you and your family to be able to stay in your home for the next 3 years. That’s because you have two kids very involved in their local public high school, and absolutely want them to be able to finish there.
You and your spouse would love to keep your home forever. But if necessary you’re willing to lose it three years from now after both kids have graduated. So you’re willing to take some risks to get there. So, even though you’re not confident that you’ll be able to keep your job, and even though you have concerns about possible upcoming medical expenses for your spouse, you are both willing to work hard and take some risks to try to keep the home for at least these upcoming 3 years.
Chapter 13 Plan
So after being fully informed by your bankruptcy lawyer, you and your spouse file a Chapter 13 case. The following good things happen:
· Your Chapter 13 payment plan provides that you slowly begin paying the $6,000 you’re behind on your first mortgage, with $100 monthly payments stretched out over the 5 years of your projected case. That’s much less than virtually any mortgage lender would otherwise allow. The relatively low monthly amount makes catching up easier and so more likely to be ultimately successful. Also, it minimizes your investment in the home each month if you do end up changing your mind later.
· Your Chapter 13 plan similarly stretches out catch-up payments towards the $2,000 in home property tax arrearage, with payments of $50 per month. The benefits above apply here as well.
· Your $20,000 second mortgage is “stripped” off your home’s title, because there’s no home equity securing it. You no longer have to make the monthly payments, nor ever have to catch up on the accumulated late payments. Plus with that mortgage lien off your title, you’re that much closer to building equity in your home. (Second mortgage “stripping” is only available under Chapter 13, not under Chapter 7.)
· Your court-approved Chapter 13 plan “avoids”—removes—a $10,000 judgment lien that a creditor recently recorded against your home’s title, arising from an unpaid hospital bill. This judgment lien “avoidance” procedure can also be done under Chapter 7 in the right circumstances. But it’s all the more powerful when done in conjunction other features available only under Chapter 13.
· The $20,000 second mortgage balance and the $10,000 judgment debt are both now treated as “general unsecured” debts. These are added to the $50,000 in other medical debts and credit card balances. So your unsecured debts now total $80,000.
What Happens to the “General Unsecured” Debts
Through your Chapter 13 plan you pay only as much of this $80,000 in unsecured debts as your budget allows. Usually, if all you can afford to do during your time in Chapter 13 is catch up on the first mortgage and property taxes (and pay the trustee’s fee and any remaining attorney fees), you would pay nothing on that $80,000.
Even when you do pay some portion of it, because your plan pays the secured debts first, the unsecured debts often receive little or nothing in the first couple years of your case. This, too, minimizes how much you pay during the early years of your case. That’s beneficial if you decide to surrender the home later.
Two Possible Endings to Our Scenario
As the Chapter 13 case plays out in this scenario, you and your spouse either succeed in making the plan payments over the months and years, or don’t. You either keep your job, or bring in a similar amount of income from another job, or you don’t. Your spouse either avoids needing a lot more medical care and piling on a lot more expenses, or doesn’t.
If you succeed in paying as your Chapter 13 plan envisioned, you can hold onto your home permanently. By the completion of your case you will have caught up on your first mortgage and the property taxes. The second mortgage and judgment liens will have been removed from the title to your home. And whatever you haven’t paid of the remaining unsecured debts will be discharged. You will be current on your home obligations and be otherwise debt-free.
But if your income decreases or your expenses increase so that you are not able to maintain your Chapter 13 plan payments throughout the entire 5-year course of your case, at that point you could decide to surrender your home. Depending on the circumstances you may then decide to amend your payment plan to exclude the home obligations. Or more likely you would convert your case into a Chapter 7 one, discharging all your debts so that you would be debt-free within a few months of that. In the meantime, you had succeeded in holding onto your home long enough to keep one, and hopefully both, of your kids in their school through graduation.
You would have benefitted from this flexibility provided only by Chapter 13.