Making Sense of Bankruptcy: Does Chapter 7 or Chapter 13 Better Protect Your Home?
Although either kind of bankruptcy will stop an approaching foreclosure, which one should you choose?
Today’s blog post is summarized by this sentence:
Generally, file a Chapter 7 “straight bankruptcy” if it buys you enough time, and otherwise file a Chapter 13 “adjustment of debts” if you need your more time, but like so much in life it really depends on all your circumstances, with some examples of when Chapter 7 would be appropriate and a list of special advantages that Chapter 13 can get you.
The Simplistic Guideline
If you are behind on your mortgage payments, and definitely want to keep your home, then the simple rule is to file a Chapter 7 case if it enables you to catch up on your back mortgage payments and any other house-related debts (like property taxes) as fast as you need to; otherwise file a Chapter 13 case to give you much more time.
If you are behind but want to either sell or surrender you home, file a Chapter 7 case if you only need to buy a few weeks or a few months and file a Chapter 13 case if you need more time, potentially even a year or two.
But It Depends
Many considerations can come into play in deciding between a Chapter 7 or 13, including ones that have nothing to do with your home (such as other special debts like income taxes or your vehicle loan). For the purposes of this blog post we focus only on considerations related to saving your home.
For example, if you’re behind on your first mortgage, whether you’ll be able to catch up through a Chapter 7 case include considerations such as: how much in missed payments you owe, how much you’d be able to pay extra each month after discharging (writing off) your other debts, how flexible your particular mortgage lender would be in giving time to catch up, whether you’re also behind on your property taxes, whether you qualify for a mortgage modification, and whether you have a second mortgage that could be “stripped” in a Chapter 13 case (see below). So, every homeowner’s situation is different and requires a careful analysis.
When Chapter 7 Could Be Enough
In your own unique situation would Chapter 7 buy you enough time or would you instead need the much stronger medicine of Chapter 13?
Here are some examples where Chapter 7 may be enough to save your home:
- You are only a few months behind on your mortgage payments, have steady income, have a lot of debts that would be discharged, enabling you to catch up on your mortgage in several months after filing bankruptcy.
- You have some money coming to pay the back mortgage payments, but have run out of time before the foreclosure sale date, and just need to buy a few weeks or couple months of time.
- You have a sale pending on your house but again have run out of time with an approaching foreclosure.
- You are very close to getting a mortgage modification approved with your mortgage lender, or are more likely get it approved after discharging you debts in bankruptcy.
- You have decided to surrender the house but need a little more time to accumulate the money needed for a rental.
Chapter 13 Advantages
If you are facing a foreclosure, often you need more time than Chapter 7 would give you. And often you need other special benefits that only Chapter 13 can give you.
For example, your income may have gone down in the recent past because of unemployment or a lower paying job, so that keeping up with the home mortgage payments became impossible. If so, you may simply be too far behind even with what Chapter 7 would save you each month (in debt payments) to be able to catch up with the mortgage anywhere close to what your mortgage lender would require. You may well need Chapter 13 because it can give you as much as five years to catch up.
It can also buy you much more time to sell your home, until you are in a better time of year for home sales, have reached a point in your family’s life when moving makes more sense, or even until the home’s value increases a year or two later.
Beyond buying time with your mortgage lender, Chapter 13 lets you:
1. Take extra time to pay unpaid property taxes, while protecting the home from tax foreclosure, and preventing your mortgage company from exercising its option to foreclose first.
2. Sometimes enables you to “strip” your 2nd (or 3rd) mortgage from your home’s title, so that you don’t have to pay that monthly payment ever again, and likely only have to pay a very small portion of that debt, so that you be become closer to building equity in your home.
3. Prevent federal and state income tax liens, child and spousal support liens, and judgment liens from attaching to your home in the first place, which prevents these tough creditors from gaining a huge advantage over you.
4. Pay off income tax liens and support liens if they have already attached to your home, while under the protection of the bankruptcy laws, undercutting the leverage those liens have over you.
5. Stop existing judgment liens from foreclosing on your home
6. “Avoid” judgment liens so that they no longer attach to your home at all.
7. Prevent creditors secured by your home from pursuing your co-signers.
8. Favor most of your home-related creditors that you need and often want to pay—mortgage companies, tax and support lien holders, and construction and utility lien owners—over most of your other creditors.