Your Home Mortgage in Chapter 7 and Chapter 13
Here are 6 ways filing a Chapter 7 case can help you deal with your home lender and related debts, and 6 ways filing a Chapter 13 one can.
If you’re buying a home your mortgage and other home-related debts are probably your most important ones. That’s especially true if you want to keep the home. So the choice between filing a Chapter 7 “straight bankruptcy” and a Chapter 13 “adjustment of debts” often turns on how each would handle these kinds of debts. We’ll get into more detail about these in upcoming blog posts, but here’s an introductory list.
- Maintain current mortgage payments: If you want to keep your home and are current on your mortgage, just continue making the payments. Doing so should become much easier since you’re likely discharging (legally writing off) all or most other debts.
- Forbearance agreement: If you are no more than a few months behind on your mortgage, enter into a “forbearance agreement” with your mortgage lender. You agree to pay an extra amount each month to catch up on the mortgage. This assumes that your bankruptcy filing frees up enough money each month so that you can catch up fast enough
- Judgment lien avoidance: Chapter 7 can often “avoid” (remove from your home title) a creditor’s judgment lien against your home.
- Stop ongoing foreclosure to buy time to sell: If you are in the midst of selling your home, filing bankruptcy may buy enough time to close the sale. A Chapter 7 case buys you only a limited amount of time. Plus the Chapter 7 trustee may also have a say in what happens. So be sure to discuss this carefully with your bankruptcy lawyer.
- Buy time to save money and move: If you’re surrendering your home, Chapter 7 can stop a foreclosure and buy you more time. You can be in your home without paying your mortgage longer, giving you more time to save money for your upcoming rent payments and moving costs.
- Discharge any “deficiency balance”: Surrendering your home without bankruptcy could result in a large “deficiency balance” owed from your mortgage debt. That’s the difference between the amount the home would sell for and the amount of the loan balances. Any such “deficiency balance” would be discharged in your Chapter 7 case.
- Maintain current mortgage payments: As with Chapter 7, it’s usually much easier to keep current than before filing. That’s because Chapter 13 usually greatly reduces how much you pay on other debts.
- Much more time to catch up: Chapter 13 gives you as much as 5 years to catch up on a past-due mortgage and/or property taxes. You enter into a court-approved payment plan based on your ability to pay. You are protected from your mortgage lender and all your creditors.
- “Strip” a second and/or third mortgage: If the value of your home is less than the balance on your first mortgage, you may be able to remove junior mortgages from your home’s title. You could stop paying these monthly payments. This would make keeping your “underwater” home more economically sensible.
- “Avoid” creditors’ judgment liens: This is the same as in Chapter 7 listed above.
- Dealing with other liens on your home: Chapter 13 usually provides more flexible and practical ways to deal with most other kinds of liens. These include liens for income taxes, child/spousal support, and home repairs/remodeling.
- Flexible timing for selling your home: You can often arrange to sell your home 2-3 years after filing. This is handy if you want to stay in your present home until a child graduates, you make a career move, or until your home’s property value increases.