As you decide whether to use the powerful tools of Chapter 13 to hold onto your home, it helps to know that you can later change your mind.
Our last blog post was about surrendering your vehicle in a Chapter 13 “adjustment of debts” case. One major advantage we discussed is being able to change your initial decision about keeping your vehicle if circumstances change.
This can be even more beneficial when dealing with a home because of the much greater amount of money involved. When you’re considering whether to use the tools of Chapter 13 to save your home, it is important to know what would happen if circumstances changed a couple years later and you decided to let go of the home.
Some of the Home-Saving Tools of Chapter 13
Here are just a few of the potential benefits of Chapter 13 “adjustment of debts” if your goal is to keep a home on which you’re behind:
· You usually get the whole length of your 3-to-5-year Chapter 13 payment plan to catch up on late mortgage payments.
· You are given the same length of time to catch up on any late property tax payments.
· Judgment liens on the home can often be “avoided”—gotten rid of.
· Second mortgages can sometimes be “stripped” off your home’s title.
An Example of These Tools at Work
Imagine that you and your spouse own a home currently worth $215,000. Its first mortgage balance is $225,000 and the second mortgage balance is $20,000. Their monthly payments are $1,000 and $300, respectively. Because of losing your job a year ago you’re 6 months late on both mortgages, $6,000 and $1,800 behind, respectively. Plus you haven’t paid last year’s property tax bill of $2,000.
Six months ago you and your spouse were sued by a collection company on n unpaid hospital bill. A year earlier your spouse had emergency appendix removal surgery, and there were complications, aggravating a prior condition. The unpaid balance is for the portion not paid by insurance. You didn’t respond to the collection lawsuit, and judgment for $10,000 was entered against the two of you. You’ve heard that there is now a judgment lien in the amount of $10,000 against your home.
You also owe $50,000 in other medical bills plus credit cards, all past due. Some of these creditors have threatened to sue you.
You have two kids who attend and are very active at their local public high school. If you had to leave your home you would not be able to afford another home within the school district. Your kids would have to change schools, something you and your spouse absolutely want to prevent.
A couple months ago you finally got a new job at the local plant of a large nationwide corporation. The position looks to be reliable, although you’ve heard rumors that the plant may close in a year or two. Also, the medical insurance coverage provided is not great. Since your spouse’s health situation continues to be tenuous, the high deductibles and co-pays leave you feeling financially exposed.
Your Legal Options
You and your spouse meet with a bankruptcy lawyer to find out your legal options. The lawyer tells you that a Chapter 7 “straight bankruptcy” filing would:
· very likely “discharge”—legally and permanently write off—the $10,000 lawsuit debt
· remove the judgment lien from your home’s title
· discharge the $50,000 in other medical debts and credit cards
· not directly affect the two mortgages or the property taxes on your home
Your lawyer carefully reviews your after-Chapter 7 budget and advises you that, under present circumstances, the two of you do not have enough disposable income to catch up on your first and second mortgage and your property taxes. So if you filed a Chapter 7 case you would have to surrender your home to your mortgage lenders. You’d have to do so within a few months.
However, you would not have to pay the mortgage payments in the meantime. So you could save money for future rent after you leave. And you’d never have to catch up on either mortgages, or on the property taxes. That alone would save you $6,000, $1,800, and $2,000, respectively, a total of $9,800.
The Chapter 13 Option
Your lawyer also informs you that if instead you wanted to keep your home, you could do so through a 5-year Chapter 13 payment plan. But that assumes your present income and expenses would remain steady. But you have genuine concerns as to the reliability of your job and the ambiguities of your spouse’s health.
So your lawyer also explained that Chapter 13 gives you the additional benefit of being able to keep your home for a few years and then surrender it only if your circumstances changes—such as if your income went down or your expenses went up—or if keeping your home because less important—such as after your kids graduate from the local high school.
See our next blog post to learn how this delayed home surrender works.