Chapter 13 can work much better than Chapter 7 if you have a judgment or HOA lien on your home, or get behind on child or spousal support.
You may need the extra help of Chapter 13 if you have any of the following liens against your home:
- Judgment lien
- Homeowner association lien
- Unpaid child or spousal support
Or you may not need that extra help. Two blog posts ago we showed scenarios where Chapter 7 “straight bankruptcy” could handle these situations well. If you’re current on your mortgage but have any of these three issues, check out that earlier blog post.
But even if you are current on your first mortgage, if you do have any of these 3 debts/liens in some circumstances Chapter 13 could definitely be better for you. Today we show you how.
When we got into judgment liens two blog posts ago, we ended by saying that having a judgment (or “judicial”) lien is not a deciding factor in choosing between Chapter 7 and 13. That’s because judgment lien “avoidance” is available under both, with the same rules for qualifying for it. (That’s in contrast to a number of legal benefits only available under Chapter 13.)
However, getting rid of (“avoiding”) a judgment lien may be procedurally easier under Chapter 13. And arguably the judgment creditor is less likely to respond and object.
To avoid a judgment lien in Chapter 7 your bankruptcy lawyer has to file a Motion for Avoidance of Lien. It’s filed at bankruptcy court along with a formal Notice of that Motion. For example, see these Local Bankruptcy Forms 717 and 717.05. Both have to be formally served on the judgment creditor. So the creditor receives these documents that no other creditor receives.
In contrast, under Chapter 13 the judgment lien avoidance language is buried within the multi-page proposed payment plan. See page 4 of the bankruptcy court’s 8-page Official Form 113 Chapter 13 Plan. All creditors receive a copy of this proposed plan. So, there’s more of a tendency for a judgment creditor to not notice the lien avoidance. And if it does notice, it’s more likely to just shrug it away if the resulting unsecured debt is being paid anything under the plan.
(Please see our earlier blog post for the rules about qualifying for judgment lien avoidance, applicable to both Chapters. Also see the applicable Section 522(f)(1)(A) of the U.S. Bankruptcy Code.)
Homeowner Association Lien
Homeowner association liens are special, and especially dangerous, for a number of reasons. In certain circumstances they can be superior to your mortgage lender’s lien. (That means it comes ahead of the mortgage itself on your home’s title.) State laws differ but generally HOAs have unusually aggressive collection powers. So you need be especially attentive if you fall behind on your HOA dues or assessments. Doing so can result in serious risks for your home, both from the HOA and your mortgage lender.
You can protect yourself from those risks much better in a Chapter 13 case. In a Chapter 7 case, if you’re behind on any HOA obligation you essentially have to work it out with your HOA. And you may well have to placate your mortgage lender at the same time. You don’t have much leverage with either.
In contrast, in a Chapter 13 case you and your home are protected while you catch up on your HOA arrearage. You do need to keep current on any ongoing dues and/or assessment payments. But as far as the past-due payments, you’d generally have up to 5 years to bring them current. As long as you stick to the court-approved payment plan you won’t have to worry about the HOA. Nor your lender.
In most circumstances, being behind on support creates a lien against your home. (This is usually the result of the legal judgment arising out of your divorce decree).
Filing a Chapter 7 case doesn’t freeze the collection actions of any support obligations. The “automatic stay” is the usual protection from creditor collections during bankruptcy. There is an exception in the “automatic stay” for the collection of support. See Section 362(b)(2) of the Bankruptcy Code.
However, filing a Chapter 13 case DOES freeze the collection of PAST-DUE support. (The collection of ongoing monthly support payments can continue, but you’d want to pay those anyway.) Because support collections can be extraordinarily aggressive, this can be a crucial benefit of Chapter 13. You DO need to fastidiously keep current on any ongoing support, and maintain your Chapter 13 commitments. But as long as you do so you’d have up to 5 years to get current on the past-due support.