Crucial Question: When Should You Consider a Chapter 13 Case Even if Chapter 7 Would Enable You to Save Your Home?

Chapter 13 has so many benefits—some potentially worth lots of money to you—that it’s worth finding out what it can do for you.

 

Why You’d Be Tempted to Not Even Think about Chapter 13

Chapter 7 “straight bankruptcy” usually takes no more than 3 to 4 months from filing to completion. Chapter 13 “adjustment of debts,” in contrast, usually takes 3 to 5 years. And usually costs significantly more.

Why in the world would someone use Chapter 13, especially after determining that they can solve their home mortgage problem with a Chapter 7 case?

10 Good Reasons to Check Out Chapter 13

There are dozens of possible good reasons for filing under Chapter 13, many having nothing to do with your home. But we’ll give you 10 very good reasons that do apply directly to your home—starting with 5 today and then the other 5 in our next blog post in a couple days.

#1: Time to Cure Arrearage:

Under Chapter 7, if you are behind on your mortgage you are at the mercy of your mortgage lender about how much time you will be given to catch up. Ten to twelve months tends to be the norm—although it can be all over the map. You are stuck with whatever your lender demands.

 

In contrast, under Chapter 13 you have up to five years to catch up on any back mortgage payments, with your lender usually not having much say about that as long as you stick to your own payment schedule. Being able to stretch out the catch-up period so much reduces how much you pay each month, making catching up easier and more likely to actually work.

#2: “Strip” Second Mortgage:

Chapter 13—and NOT Chapter 7—may allow you to “strip” your second mortgage off your home’s title, so that you don’t have to pay any or most of it. IF your home is worth no more than the amount you owe on your first mortgage so that you qualify, this mortgage “stripping” could save you hundreds of dollars per month, and tens of thousands (or more) of dollars when you complete the case. Your savings over the life of that second mortgage would be huge—not just all or most of the outstanding principal balance but also all the interest you would have paid (which is often much more than the principal).

#3: Cure Property Taxes While Under Protection:

If you are behind on property taxes, that makes your mortgage lender nervous and angry. That’s because the property tax comes ahead of your mortgage on your home’s title. The lender itself could be foreclosed out—and get nothing—if the property tax lien is foreclosed upon by the county or by whatever governmental entity you owe the property tax to.

Chapter 13 prevents the county/governmental entity from starting a foreclosure, and also provides a good way for you to catch up on the property tax arrearage. That directly helps you, but indirectly helps your lender. At the end of your case you are current on your property taxes, while also being current on your mortgage, making both you and your lender happy.

#4: Pay Off and/or Clear Income Tax Liens at Your Pace:

An income tax lien on your home is handled extremely well under Chapter 13, under all the possible circumstances.

If it is lien on a tax that can be discharged (legally written off)—usually because it is old enough—and there is no equity backing up the lien (because the value of your home is eaten up by your mortgage(s) or other liens ahead of it on the title), you will pay little or nothing on this tax.

If the tax behind the tax lien could be discharged but there IS some equity backing up the lien, then under Chapter 13 you have a good mechanism for minimizing how much you must pay to get the release of that lien. And you also have a good way to pay that amount—through your Chapter 13 plan, all the while being protected from, instead of being at the mercy of, the IRS or state tax agency.

If the tax can’t be discharged—usually because it is not old enough—and there’s no equity backing up the lien, the tax must be paid through your Chapter 13 plan just like any other “priority” debt. So it is paid in full, but usually without interest, and with flexibility in the payment amounts and their timing, based on your budget and your other more pressing obligations.

And if the tax can’t be discharged and there IS equity backing up the lien, the tax is paid in full through your plan, with interest. But again you’ll have flexibility in the amounts and timing of your payments. And you’ll be protected from the IRS/state taking further collection activity against you in the meantime.

In all four of these scenarios, at the end of your case you will owe no income tax and the tax lien will be released.

#5: “Void” Judgment Liens:

A judgment in court against you almost always results in a judgment lien against you in the amount of that judgment—which usually increases over time with interest. The creditor can in many situations then foreclose on that lien to force you to pay it.

You can “void”—get rid of—a judgment lien against your home in bankruptcy. Generally, the equity in the home must just not be any more than the homestead exemption applicable to your home. If your attorney does “void” the judgment lien during your bankruptcy case, that lien will be taken off your title, the debt behind that judgment will likely be discharged, leaving you owing nothing and with a clean title on your home.

Judgment liens can be voided in either Chapter 7 or Chapter 13, but this often works better under Chapter 13 in combination with all of its other home-related benefits.

Conclusion

So, 1) if you are behind on your mortgage payments more than you can catch up quickly, 2) if you have a second (or third) mortgage that can be “stripped,” 3) if you are behind on your property taxes, or 4) if you have a tax lien or 5) a judgment lien, you should look into Chapter 13. That’s true even if Chapter 7 look pretty good at first.