The Power of Chapter 13 to Save Your Home, Brought to Life
A mere list of the many ways that Chapter 13 can help save a home can start sounding dry. So here’s a powerful example that shows off some of its extraordinary advantages.
Let’s start by setting the scene. Say you lost your job in early 2010 and, except for temporary, part-time work, you did not find new full-time employment until 3 months ago. It pays less than your old job.
- While you weren’t working full-time, you used up your savings and then borrowed on your credit cards to try to pay the house payments. That seemed to make sense at the time because you kept getting promising job leads, none of which panned out until you finally got hired for your present job. So you owe $18,000 on the credit cards, with minimum payments totaling $550 per month.
- After your savings and available credit ran out, you still fell $5,000 behind on your first mortgage and $3,000 behind on your second. They are both starting to send papers sounding like they are going to start foreclosing.
- Because there wasn’t enough money in your property tax escrow account with your first mortgage lender to pay the recently due annual $2,000 property tax bill, the lender is demanding that you pay that right away. It is threatening to foreclose for this separate reason if you don’t.
- You had some medical problems soon after losing your earlier job, while you had no medical insurance, resulting in a $7,500 medical bill. That went to a collection agency, turned into a lawsuit, and then recently into an $8,000 judgment lien against your home.
- Money had been tight even back before you’d lost your job because of cutbacks in hours, so you cut your tax withholding way back, so that you owed $2,000 to the IRS for 2009 income taxes. You couldn’t make the agreed monthly installment payments, and have just found out that that a tax lien has been recorded against your home in the amount of $3,000, after adding in all the accrued penalties and interest.
- While you were working temporary jobs during 2010 and 2011, you were desperate for every dollar you could bring home, and so didn’t have any taxes withheld. As a result you owe the IRS another $2,500 for each year, or a total of another $5,000 that you have not even filed tax returns for yet. You’re afraid to because you have no money to pay it and are afraid of more tax liens against your home.
- Your home was worth $300,000 in 2008, but has lost about 25% of its value by now, so is worth $225,000. You owe $230,000 on the first mortgage, with monthly payments of $1,000, and owe $50,000 on the second mortgage, with monthly payments of $300.
- With your current reliable income, after paying modest but reasonable living expenses, you have $1,500 available monthly for all creditors, including the two mortgages. That’s only $200 per month beyond the two mortgage payments, a drop in the bucket considering this mountain of debt:
- credit cards: $18,000
- first mortgage arrears: $5,000
- second mortgage arrears: $3,000
- property tax arrears: $2,000
- judgment lien: $8,000
- 2009 income tax with tax lien: $3,000
- 2010 and 2011 income tax: $5,000
That’s a total debt of $44,000, besides the $230,000 first mortgage and $50,000 second mortgage.
- Last fact: your two school-age kids live with you, they’ve lived in this home their whole lives, and have gone to the good local public schools for years, with their friends who live in the neighborhood. So more than anything you want to maintain this home and the stability it brings to their lives (and yours!). But it sure seems hopeless.
A Chapter 7 “straight bankruptcy” would help by discharging (writing off) tens of thousands of dollars, but NOT likely help nearly enough for you to be able to keep the home. A Chapter 7 case would likely discharge all or most of the credit card balances, as well as the medical bill that turned into the judgment, and likely even get rid of that judgment’s lien on your home title. That would save you about $26,000, and take away one threat to your home. But with only $200 to spare after paying the current first and second mortgage payments, that $200 is just way too small to even begin to satisfy the mortgage lenders or the IRS, much less both.
So after your Chapter 7 case would be completed, the IRS would attempt to collect the 2009 debt through garnishments of your bank account or wages, and sooner or later you’d have to deal with the 2010 and 2011 taxes, possibly resulting in them at some point turning into tax liens. And sooner or later your home would be foreclosed because you would have no way to catch up on the mortgage arrears.
However, if INSTEAD you filed a Chapter 13 case, under these circumstances you very likely you WOULD be able to keep your home, cure the mortgage arrears, and pay off all the taxes. And all this would happen while you and your home was protected from collection efforts by any of your creditors. How could that possibly be? I’ll show you in my very next blog. Sorry to keep you hanging, but today’s blog is way too long already.
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