Crucial Question: Why Even Consider a Chapter 13 Case When Chapter 7 Looks Good Enough?
5 more very good reasons Chapter 13 is worth a close look, even if it takes much longer, and looks more expensive at first.
In our last blog post we gave the first 5 of 10 good reasons for filing under Chapter 13, even when Chapter 7 appears to do enough to save your home. Here is the other 5—#6 through #10.
#6: Pay Child Support and Get Lien Released:
Chapter 7 does nothing to directly help you deal with back child support. It doesn’t even stop collection efforts against you. Your ex-spouse or support enforcement agency could enforce its lien against your home. And they can likely garnish your wages, and even probably suspend your driver’s license and even your professional or occupational license.
In contrast Chapter 13 does stop collection for back child support, including any enforcement of a support lien that was placed on your home. As long as you follow certain rules (especially, keeping current on any ongoing regular support), you are kept protected while you catch up on the back support, with payments based on your budget. Once you’re current, the support lien against your home is released.
#7: Protect Any Equity Beyond Homestead Exemption:
Most people don’t have too much equity in their home when filing bankruptcy—their homestead exemption protects that equity. But if the value of your home is greater than the amount your homestead exemption allows, you could lose your home under Chapter 7.
Chapter 13 provides a way to keep your home in this circumstance. Usually it means paying more to your creditors. But sometimes it doesn’t, instead just paying “priority” creditors (such as recent income taxes or back child support) through your Chapter 13 plan. But that sure beats having your Chapter 7 trustee take and sell your home in order to pay such debts out of your home’s sale proceeds.
#8: Prevent New Liens:
A Chapter 7 case lasts only 3-4 months usually. But the protection—the “automatic stay”–that it provides to you, especially against special debts which do not get discharged in bankruptcy—like recent income taxes or back child support—also only lasts that long. So after that length of time the IRS or state, or an ex-spouse or support enforcement agency, could attach a lien to your home if you do not pay the obligation under the terms they demand. That demand may simply be to pay it in full when you have no ability to do so.
Chapter 13 in contrast, first, provides a mechanism for paying such obligations over the course of up to 5 years—that mechanism being the Chapter 13 plan. And second, throughout that period of time Chapter 13 protects you and your home from these kinds of creditors taking steps like imposing a lien against your home. Having been protected throughout the time that you are paying off these kinds of obligations, by the time your Chapter 13 case is finished, those special debts are paid off, leaving no further threat of liens being imposed.
#9: Avoid Start or Re-Start of Foreclosure:
Similarly, in a Chapter 13 case any creditor which would otherwise have had a right to foreclose on your home can neither start a foreclosure nor resume one it had started earlier.
Under Chapter 7, if you’re behind on your mortgage and commit to catching up within 10 months, but you are simply preventing from doing so because of your changed circumstances, there is nothing that prevents that lender from starting a foreclosure (or re-starting one that had been started before your bankruptcy was filed). Or if you succeed in catching up during those 10 months but then a year or two later you can’t make the payments, the lender can start a foreclosure.
Chapter 13 certainly has its limitations on the protection it provides. A mortgage lender can ask for and get permission to foreclose if you do not fulfill certain commitments. But the point is that it can’t just start foreclosing. Your attorney can often negotiate a new plan. The lender may well be cooperative because it knows has to ask for and get court permission to foreclose. So you have this significant extra layer of protection, which can make all the difference
#10: Schedule Sale of Home in the Future:
As part of Chapter 13’s flexibility, in many circumstances it can enable you to sell your home a few years from now, but get protection from your creditors in the meantime.
You may be in a situation in which you know when you will be ready to downsize, such as when your son or daughter will be graduating from the local high school or when a spouse will be retiring. Your Chapter 13 plan may be structured so you can sell your home then, two-three years after your case is filed, and perhaps delay paying off most of your mortgage or property tax arrearage until then.
So, if 6) you have a child support lien on your home, 7) have more equity in your home than is allowed under your homestead exemption, 8) have debts that would not be discharged under Chapter 7 and could result later in a lien against your home, 9) are concerned about being able to pay your mortgage arrearage as fast as you will be required to do so after a Chapter 7 case, or 10) would benefit from a plan to sell your home a few years from now while getting protection from your creditors in the meantime, look more closely into Chapter 13. Even if Chapter 7 look pretty good at first.