Here are 3 more scenarios for when you are current on your mortgage, where Chapter 7 works well in dealing with other home-related debts.
Our last blog post was about situations in which Chapter 7 works well enough in the following 3 debt situations:
- Second or third mortgages
- Property taxes
- Income tax with a lien recorded on your home
In general, if you are current on your first mortgage but have any of these 3 debts, sometimes Chapter 13 helps much more than Chapter 7. But last time we showed scenarios when you don’t need the extra time and expense of Chapter 13.
We do the same today with the following 3 other home-related types of debts:
1. Judgment with a lien attached to your home
2. Homeowner association debt with a lien
3. Child/spousal support unpaid with a lien
In bankruptcy you can often remove a lien on your home arising from a creditor’s judgment against you. That’s important because otherwise the lien would continue on your home’s title even after you discharge (legally write off) the underlying debt.
Whether you can remove, or “avoid,” the judgment lien depends on the value of your home, the amount of its equity, and amount of your applicable homestead exemption. If all of the judgment lien “impairs,” or cuts into, your homestead exemption, you can remove that lien.
For example, assume your home is worth $200,000, you owe $175,000 on the mortgage, so you have $25,000 in equity. Your state’s homestead exemption is $30,000, covering all of your equity and more. You have a judgment lien on your home’s title in the amount of $10,000. All of that $10,000 cuts into the equity that’s protected by your $30,000 homestead exemption. So you can “avoid,” or remove the entire judgment lien in bankruptcy.
There are some tools affecting liens that are available only in Chapter 13, not in Chapter 7. This is not one of them. You can “avoid” a judgment lien under the same rules in either Chapter 7 or 13. So this is not a deciding factor between these two bankruptcy options.
Homeowner Association Lien
State laws differ on homeowner association liens. But in general not being current on your HOA dues and/or assessments can be a significant problem. It can catch you by surprise. So be sure to tell your bankruptcy lawyer if you are paying HOA dues or assessments. Of course be sure to tell if you are not current on them.
One of the reasons these liens are dangerous is that under some circumstances they are superior to your mortgage on your title. Falling behind is likely an independent basis for foreclosure by your mortgage lender—even if you’re current on the mortgage itself. Also, the timetable for action by your HOA may be quick compared to a home lender’s foreclosure.
If you have monthly HOA dues and you’re current on them, and intend to stay in the home, filing a Chapter 7 case should be fine.
But if you’re at all behind with your HOA and don’t have an agreed payment plan to catch up, talk with your lawyer about your options, including Chapter 13. You’d very likely have more time and flexibility in catching up and keeping your home protected while doing so.
Often, being behind on support creates a lien against your home. That may even happen when you’re current (through the judgment arising out of your divorce decree).
Filling a Chapter 7 case should be fine if you are current on all support obligations at time of filing. If you are not current but expect to be very shortly thereafter, be aware that filing a Chapter 7 case does NOT freeze the collection actions of any support obligations—neither ongoing monthly ones nor those in arrears.
However, Chapter 13 CAN stop the collection of support obligations that are in arrears. Those collections can be unusually aggressive—sometimes resulting in even the loss of your driver’s license, or possibly your occupational or professional license. So knowing that Chapter 13 can freeze collections and buy you time to catch up is important. If this debt is causing you serious problems this may be reason enough to choose Chapter 13.