If you are behind on your mortgage and want to sell, you may be able to delay the home sale for years and pay the arrearage out of the sale.
In a recent blog post we listed 10 ways Chapter 13 helps you keep your home. Here’s the third one of those ways:
3. Much Greater Flexibility in Selling Home
If you want to sell your home while in the midst of a lot of financial pressure, Chapter 7 “straight bankruptcy” does not buy you much time. It protects you and your home from your mortgage lender for at most only about three or four months. In contrast, a Chapter 13 “adjustment of debts” potentially protects you for years until you’re ready to sell.
You may need to sell your home for financial or personal reasons, but want to delay doing so. For example, you may want to wait until a kid finishes high school or you reach an anticipated retirement date before you’re ready to move. Even if you’re behind on your mortgage, Chapter 13 can often enable you to delay selling until you’re ready.
Here’s an example to show how this works in practice.
Assume that because of injuries from a vehicle accident you were temporarily disabled and couldn’t work. As a result you fell behind on your home mortgage loan by $10,000—8 payments of $1,250 per month.
You are now back at work but earn only enough income to be able to afford the $1,250 monthly mortgage payment. You don’t have enough cash flow to begin to catch up on the $10,000 you’re behind. Nor do you have any savings to pay that $10,000, or anything to sell to raise that much money. Your mortgage lender is threatening to foreclose if you don’t bring the account current.
The home is worth $225,000, the mortgage balance is $175,000, and home prices in your area are currently rising steadily. The homestead exemption that applies to your home in your state is $35,000.
Your employer is planning on opening a new regional center in another state in two years. It offered you an incentive to move your job there; you decided to accept because you have family there. You want to delay selling your home until when that job move in two years.
Chapter 7 Won’t Likely Solve the Problem
If you file a Chapter 7 “straight bankruptcy” it’ll help but often not enough. You would be able to stop paying most of your debts right away. Many of those debts would be legally written off—“discharged”—in bankruptcy forever. That may buy you enough monthly cash flow so that you could pay something to your mortgage lender each month towards catching up on the $10,000 arrearage.
So if you and your bankruptcy lawyer could make arrangements with your mortgage lender to catch up as fast as the lender would require you to, then Chapter 7 may well be what you need. But at $10,000 behind, that would likely require monthly payments around $1,000. And that would be IN ADDITION TO the regular monthly $1,250 mortgage payment.
If you couldn’t catch up fast enough to satisfy your lender, then Chapter 7 wouldn’t help you enough. It wouldn’t enable you to hold off on selling your home for 2 years. It almost for sure wouldn’t let you avoid catching up on your mortgage arrearage for that long. If you couldn’t satisfy your mortgage lender fast enough, your home would be foreclosed.
Chapter 13 Buys You Time to Sell Your Home
In contrast, a Chapter 13 case could potentially protect your home for years until you’re ready to sell.
In the usual case, if you are in arrears on the mortgage your Chapter 13 payment plan would have to earmark enough in monthly payments towards that arrearage so that you brought the account current by the time the case was completed. That usually gives you 3 to 5 years to catch up.
If there is equity in your home (such as in this example), you can likely hold off making catch up payments for a while. You DO have to make the regular monthly mortgage payments as soon as your case is filed. Falling any further behind DURING the case is considered very inappropriate. But if you have a significant equity cushion, and especially if market values are rising, you’re given more flexibility about when you have to catch up on the mortgage.
When, as in our example, you know when you want to sell your home, you and your lawyer can incorporate that into your Chapter 13 payment plan. You would likely be able to hold off on paying towards the arrearage in the meantime. Or, if you can afford it, you might want to make modest payments towards the arrearage. That way you would have more equity and get more money out of your home when you do sell two years later.
Chapter 13 would likely allow you to put off selling your home until the time is right for you. If the home has some equity, you may even be able to delay paying any or most of the mortgage arrearage until doing so out of the anticipated proceeds of the sale. This would allow you to focus your financial energies in the meantime on making the regular monthly mortgage payments, and on any other high-priority obligation(s).