Your Paid-Current Home Mortgage in Chapter 7 and 13
There are scenarios when you are current on your home mortgage and are dealing with other home-related debts where Chapter 7 works well.
You’re current on your home mortgage payment, although you’ve been struggling mightily to keep it that way. You’re thinking very seriously about getting some financial help through bankruptcy. But you absolutely want to keep the home that you’ve fought so hard to keep current.
You’re trying to decide between Chapter 7 and Chapter 13, and are about to see a bankruptcy lawyer. So far you see some advantage in one or the other, or maybe in both. Maybe Chapter 7 is attractive because it seems easier and quicker. Or maybe Chapter 13 looks better because it handles certain of your special debts better. Either way you want to make sure you can keep paying your mortgage so you can keep your home.
How does this work in Chapter 7 and Chapter 13? Today we’ll start with Chapter 7, and get to Chapter 13 later.
If you’re current on your home mortgage payments you can virtually always keep your home under Chapter 7 “straight bankruptcy.”
A big set of considerations is whether you are also current on and/or have manageable ways to deal with other debts on your home.
Other Home-Related Debts
There are other debts related to your home that can cause significant problems even if you’re current on your mortgage. Some of these debts are better handled under Chapter 13 “adjustment of debts.” Some are tremendously better under Chapter 13. On the other hand some are handled just fine under Chapter 7. How these considerations apply to your situation can often affect which of these two options would be better for you.
These other home-related debts include the following:
- Second or third mortgages
- Property taxes
- Income tax owed with a lien recorded on your home
- Judgment with a lien attached to your home
- Homeowner association debt with a lien
- Child/spousal support unpaid with a lien
Current on or Make Arrangements to Pay Home-Related Debts
Chapter 7 likely makes sense in the following situations with the types of debts just listed above. Generally these are when you’re either current on these debts or can make reasonable arrangements to pay them. We’ll cover the first 3 of these types of debts today and the other three in our next blog post.
1. Second or third mortgages:
Chapter 7 makes more sense if your home is worth than your first mortgage debt balance. (Or the combination of your first and second mortgage balances if you have a third mortgage.) Plus you’re current on your second (and, if applicable, your third) mortgage. If you’re not current you’ll be able to catch up fast enough to satisfy that mortgage lender.
If, however, your home is worth less than your first mortgage, you may be able to “strip” your second mortgage from your home’s title. This is only available through Chapter 13. “Stripping” your second/third mortgage could save you a tremendous amount of money. That would often make Chapter 13 a potentially much better option. (Similarly if you have a third mortgage and your home is worth no more than the first two mortgage balances.)
Also, if you are significantly behind on your second and/or third mortgage but don’t qualify for “stripping” that mortgage, you may need the extra help that Chapter 13 can give in getting caught up.
2. Property taxes:
If you’re current on your property taxes of course you’ll need to stay current. Discharging all or most of your other debts in a Chapter 7 case should make this easier.
If you aren’t current you’ll need to do so quickly or else your mortgage lender will be very unhappy. Even if current on your mortgage, falling behind on your taxes is a separate basis for foreclosure by your lender. If you can’t catch up fast enough on your property taxes to satisfy your lender, you may need Chapter 13 to buy more time.
3. Income tax owed with a lien recorded on your home:
Usually, under Chapter 7 you have to pay a tax that is backed up by a lien on your home. You also have to pay the ongoing interest and penalties. If the debt is relatively small, and you can make the monthly payments required by the IRS or state, Chapter 7 may be your best option.
However, is the underlying income tax old enough so that it could be discharged if there was no lien? Is there insufficient equity in the home to cover the entire tax lien? In these situations you may avoid paying such a tax, or paying only a portion, under Chapter 13.
(Again, we’ll cover the final three types of debts listed above in our next post in a couple days.)