Keeping Your Home through Chapter 13
Chapter 13 gives you much more time to catch up on your unpaid mortgage payments. That can be reason enough choose this option.
Filing either a Chapter 7 “straight bankruptcy” case or a Chapter 13 “adjustment of debts” one stops a pending home foreclosure. And they can both prevent one from begin started. Assuming you’re behind on your mortgage and want to keep your home, whether you should file under Chapter 7 or Chapter 13 depends on how far behind you are and how much help you need in catching up.
Protection through the “Automatic Stay”
Filing either a Chapter 7 or Chapter 13 case immediately imposes the “automatic stay” on your mortgage lender, and on all your other creditors. This is the federal law which stops and prevents (“stays”) virtually all collection actions against you or your property, including a home foreclosure.
Under Chapter 7 this “automatic stay” protection only lasts a short time, usually about three months or so. And the mortgage lender can even ask the bankruptcy court to cut short that protection.
Buying Some Time with Chapter 7
As we said in our last blog post, Chapter 7 usually lets you keep your home if you are current or not too far behind on your mortgage payments.
Most people who file a Chapter 7 case gain some monthly cash flow because they no longer have to pay some of their debts. Consider the Chapter 7 option if you want to keep your home and after filing bankruptcy you would have enough cash flow to make both your regular mortgage payments plus enough extra to be able to catch up on the late payments fast enough to satisfy your particular mortgage lender(s).
How much time you’ll have depends on the particular lender. About a year is a very rough estimate, but this varies widely so discuss this with an experienced bankruptcy lawyer to get a better idea what your lender will allow in your circumstances.
Buying a Lot More Time with Chapter 13
Instead of buying just a matter of a few months, Chapter 13 can usually give you as much as five years to catch up on your back mortgage payments.
If you are in foreclosure or anticipating that you will be soon, you could easily be tens of thousands of dollars behind on your mortgage. You may also be behind on property taxes and/or homeowner association assessments. You likely need as much time as possible to catch up on these. Stretching the repayment period out as long as five years can greatly reduce what you have to pay each month to catch up. This can make keeping your home much more feasible.
Not Need Lender’s Consent
Under Chapter 7 you are largely at the mercy of your lender regarding how much time you’ll have to get current. So you have to pay the necessary amount each month to accomplish that.
Under Chapter 13 you don’t rely on the cooperation of your mortgage lender. As long as you follow the law in how you and your lawyer put together the Chapter 13 payment plan, and then comply with that plan, the lender has little choice.
It can keep your feet to the fire to make sure you comply with the plan you propose and that the court approves. If you don’t pay as the plan says, you can still lose your home. But you’re much more in the driver’s seat, following a financial plan based on what your budget says you can afford to pay.
Not only do you get much more time to catch up on your mortgage(s), you also often get a fair amount of flexibility in how and when that happens in relation to your other pressing debts.
For example, let’s say you are also behind on your vehicle loan or child support. Depending on the amount of equity in your home and other factors, you may be able to pay such other even more urgent creditors ahead of or at the same time as you’re catching up on the mortgage.
Sometimes you may even be able to catch up on your mortgage in part or in full through a refinancing of your home. That refinancing may even be purposely delayed a couple years to allow for more equity to build up in your home.
Chapter 13 case comes with other kinds of flexibility. Your payment plan can from the outset reflect future anticipated increases in income or available funds, such as after a child starts school and a spouse begins making an income. That can make the payment plan easier in the meantime.
When financial circumstances change midstream, your Chapter 13 plan can usually be adjusted to reflect changes in your income and expenses.
These various kinds of flexibility make more likely that you can keep your home in the long run.
The Flexibility to Safely Change Your Mind
Your financial or life circumstances could change a year or two after filing your Chapter 13 case so much that you end up deciding you don’t want to keep the house after all.
For example you may get a new job out of the area, or a child may graduate from the local high school and leave home, so that keeping the home is no longer appropriate or necessary.
Under Chapter 13 you can change your mind and sell or surrender the home then, in a more financially protected way. You can do so by amending the terms of your Chapter 13 payment plan, by converting your case into a Chapter 7 one to discharge any remaining debts, or even by simply dismissing (closing) your case if you don’t need its benefits any longer.