Filing a Chapter 13 case buys you time and flexibility for catching up on your mortgage arrearage. Lots more of both than in Chapter 7.
Two blog posts ago we said Chapter 7 buys some time with your home mortgage while Chapter 13 buys much more time. We then showed how Chapter 7 can help. Today we get into how Chapter 13 can be much better.
The Limits of Help from Chapter 7 “Straight Bankruptcy”
Chapter 7 is quick, but is limited in what it can do for your past-due mortgage. Mostly it can help get rid of other debts so that you can financially focus on your mortgage.
Chapter 7 helps with your mortgage only indirectly. If you’re behind on payments you’ll have to make arrangements with your mortgage lender to catch up. The bankruptcy case gives you no mechanism or protection in that catching up process. You’re essentially on your own, and at the mercy of whatever timetable your lender imposes on you for catching up.
That has some practical consequences if you’re behind on your mortgage and want to keep your home. If you file a Chapter 7 case, you need to be confident that you can catch up on your mortgage fast enough to satisfy your mortgage lender. That means that you must:
· have access to a pool of money to catch up on your mortgage within a couple months after filing bankruptcy;
· make prior arrangements with the lender for adequate monthly catch-up payments; or
· know the lender’s policies about catch –up payments, especially how much time the lender allows to get current.
Assuming that you don’t have that pool of money to catch up in a lump sum, your bankruptcy lawyer may be familiar with your particular mortgage lender’s policies and practices about doing so through monthly payments. Those policies and practices can vary widely among lenders. Plus, your individual circumstances can greatly affect how flexible your lender is willing to be with you.
When You Need Chapter 13 “Adjustment of Debts”
Focusing only on your mortgage itself, you need a Chapter 13 case when Chapter 7 isn’t good enough. You want to save your home but won’t have enough money or time to catch up as your lender demands.
There are lots of reasons to file under Chapter 13 that have nothing to do with your home. For example, it can be the best way to deal with income taxes, child support, or a vehicle loan. There are also many possible reasons that involve your home but not your first mortgage. For example, Chapter 13 can deal well with an income tax lien, unpaid property taxes on your home, or a second mortgage.
But today let’s focus on buying time with the mortgage itself.
Stretching Out Mortgage Catch-up Payments
In a Chapter 13 case you get as long as 5 years to catch up on a mortgage. Based on your income your payment plan will be required to be either 3 years or 5 years long. But even if you qualify for a 3-year plan you can usually stretch it out up to 5 years. Your budget just needs to justify that you need more time.
Stretching the amount you’re behind over such a long period make the monthly catch-up payments more reasonable. If you are quite far behind, it can make keeping your home manageable when otherwise it wouldn’t be.
Flexibility in Catching Up
Another crucial benefit of Chapter 13 is the power it gives you over your mortgage related to other important debts. A few paragraphs ago we mentioned other debts like income taxes, child support, and vehicle loans. After you finished a Chapter 7 case your mortgage lender would not care at all about other debts you may continue to owe. In contrast, Chapter 13 allows you to address those other debts at the same time as your mortgage.
How this works depends on the specifics of your case. The laws about Chapter 13 determine how different creditors can be treated. A huge factor is the legal category of each debt—secured, “priority,” and “general unsecured.” Also important are specific facts, such as how well secured your mortgage is by your home’s equity. Generally the more equity there is to protect your lender the more flexibility you’ll have.
We’ll get into these kinds of specifics in upcoming blog posts. For now what’s important is that a Chapter 13 case filed through your bankruptcy lawyer powerfully buys time and enables you to meet other essential debt obligations, all the while protecting you from your mortgage lender and from all your other creditors.