Chapter 13 gives you much more power over your mortgage and other home-related debts so that you can delay your home sale to a time when it’s best for you.
Our last blog post was about using Chapter 7, “straight bankruptcy,” to buy time to delay the sale of your home. The advantages of Chapter 7 are that it’s usually quite quick and costs less than Chapter 13. It also importantly focuses on your present income and the current value of your home. If you expect either your income or your property’s value to increase substantially, Chapter 7 could be your better option.
Chapter 7 Disadvantages—Buys a Limited Amount of Time
However, Chapter 7’s quickness can often turn into a disadvantage. If you’re behind on your mortgage or another home-related debt, the protection Chapter 7 provides against them doesn’t last long. The “automatic stay” protection lasts—at most—only 3-4 months because that’s how quickly most cases finish. If within that time, you don’t work out payment arrangements with them, they can start or resume collections and foreclosure.
So Chapter 7 often doesn’t give you much additional time to sell your home.
Chapter 7 Disadvantages—Buys Limited Leverage with Ongoing Creditors
Also, if your mortgage holder or other home-related creditor refuses to negotiate, you have almost no leverage under Chapter 7. Not only does automatic stay protection expire within just a few months, but the creditor can also often speed up that timetable. Chapter 7 doesn’t give you any other reliable tools directly against your mortgage holder or home lienholder. Mostly what it does is discharge (write off) other debts so that you can focus on your home creditor(s). If that doesn’t buy enough time to sell your home, Chapter 7 is probably not your best solution.
Chapter 13 Advantages—Buys Much More Time and Leverage
A Chapter 13 “adjustment of debts” case buys you time and flexibility if you want to keep your home and are behind on your mortgage and other home-related debts. It does so by protecting you and your property while you catch up on your mortgage over a 3 to 5 year period.
These are all also true if you want to sell your home but need more time to do so. Chapter 13 can often provide you time to delay the sale of your home when the market is not a seller’s market. For example, instead of being forced to sell during the holiday season you could sell during the prime spring season. Or hold off on selling when doing so now would cause personal or family hardships. In many situations, you could delay selling your home for many months, or even years.
The Power of Chapter 13
The way this works is that you and your bankruptcy lawyer put together a monthly payment plan covering the next 3-to-5-years. This plan goes through a 2-3-month bankruptcy court approval process. The plan would show how you’d make progress towards catching up on your mortgage and other essential debts. Usually, you’d pay general unsecured debts only as much as you can afford to pay them after paying other more important debts. Often these unsecured debts don’t receive much.
During your plan, you would have to pay your monthly mortgage. And usually, you’d have that same length of time to catch up on a first or second mortgage. Same thing if you were behind on property taxes or anything else that was a lien on your home’s title.
What if you couldn’t afford to catch up within even the 3-to-5-year length of a Chapter 13 payment plan? Under some circumstances, you wouldn’t have to pay that much. If there is enough equity in the home, you could pay the remaining amount out of the proceeds of the intended home sale.
Chapter 13 could enable you to delay selling your home until the time is right for you. If your home has a healthy equity cushion, you could catch up on some or all of the missed mortgage payments until you sell the house. As long as you comply with the plan, you wouldn’t need to worry about a pending foreclosure or other collection pressures. Instead you could focus on making the regular monthly mortgage payments and Chapter 13 plan payments. And then sell your home at a time that serves you best.