Gaining Power Over Your Home Mortgage

The bullet points below will show how Chapter 7 and Chapter 13 can help you gain power over your home mortgage.

Home Mortgage
Photo by Scott Webb on Unsplash

Considering the importance of your home, choosing to file a Chapter 7 “straight bankruptcy” and a Chapter 13 “adjustment of debts” often turns on how each would handle your mortgage. Here is how each would do so.

Chapter 7

Home Mortgage is Current and Want to Keep Your Home
    • You want to keep your home. You continue making the payments after filing bankruptcy.
    • The mortgage has been a struggle to keep current. Staying current should be a lot easier after discharging all or most of your other debts.
Home Mortgage is Not Current
    • You are only a few months behind and want to keep your home. Usually, you can enter into a “forbearance agreement” with your mortgage lender. The lender agrees not to foreclose in return for you paying extra each month to catch up within a specified time. The timeline is usually not more than a year. This agreement works if your bankruptcy improves your cash flow enough to pay both your regular and catch-up payments each month.
Judgment Liens
    • You have a judgment lien against your home as a result of a creditor’s lawsuit against you. In many circumstances that lien can be “avoided,” taken off the title. The underlying debt from the judgment would almost always be discharged—legally wiped out.
    • Most other kinds of liens—from taxes, child/spousal support, remodeling contractors, your homeowner’s association—are usually not affected by a Chapter 7 case. You will likely need to pay off the debt to get rid of the lien. Talk with your attorney because there are many kinds of liens, each with their own rules.
Close to a Sale
    • You are close to a sale on your home, but there is a foreclosure sale coming up. A Chapter 7 filing can stop the foreclosure and buy time to close the deal. Coordinate this carefully with your Kalispell bankruptcy attorney because 1) the Chapter 7 trustee can sometimes complicate the situation, and 2) this buys you only a limited amount of time.
Decided to Surrender Your Home
    • You have decided to surrender your home. Chapter 7 can stop foreclosure and buy you more time to be in your house rent-free, more time to save money for your upcoming rent payments and moving costs.
    • If you were to surrender your home without bankruptcy, you could owe a big “deficiency balance” on your first and/or second mortgages. The amount could be the difference between the amount the home would sell for and the amount of the loan balances. Your Chapter 7 case would discharge any such deficiency balance.

Chapter 13

Home Mortgage is Current and Want to Keep Your Home
    • You continue making the payments directly to your lender after filing your Chapter 13 case. If it has been a struggle to keep current on the mortgage, it should be a lot easier because Chapter 13 often radically reduces how much you pay to other creditors.
Home Mortgage is Not Current
    • Chapter 13 gives you much more time to catch up than a Chapter 7 case.  You enter into a court-approved “plan” to get current on the mortgage, and your ability to pay will dictate the payments. The plan incorporates all your other debts into one package–including other significant debts like income taxes, support obligations, and vehicle loans—while protecting you from all your creditors.
    • If you have a second mortgage, and the value of your home is less than the balance on your first mortgage, a Chapter 13 can “strip” that second mortgage off your home. You will no longer have to make that monthly payment, often significantly reducing what your home costs you each month. And your home becomes much less “underwater,” which is an incentive for you to keep your home. 
Judgment Liens
    • Chapter 13 can often avoid, take off the title, a judgment lien against your home that resulted from a creditor’s lawsuit.
    • Chapter 13 provides a favorable way to take care of most other kinds of liens.
      • With income tax liens, the Chapter 13 plan will pay the underlying tax debt, and then the lien released after the case.
      • Same thing with child/spousal support liens.
      • These kinds of creditors can be very aggressive, but under Chapter 13—unlike Chapter 7—they cannot take any collection action whatsoever while you pay off the underlying debts, as long as you fulfill your obligations under the plan.
Want to Sell Your Home
    • Chapter 13 gives you some flexibility about when to do so, even if it’s a few years down the line. For example, if you want to stay in your neighborhood until your child finishes at the local school or until you can downsize, or perhaps even until the property value increases, your Chapter 13 plan can determine the timing.
    • As with Chapter 7, if you are close to a sale on your home but there is a foreclosure sale coming up, a Chapter 13 filing can stop the foreclosure and buy time to close the deal. Usually, it can buy you more time than a Chapter 7 can.
Decided to Surrender Your Home
    • You can surrender a home under Chapter 13 as with Chapter 7. Depending on the circumstances, you may be able to delay the surrender longer. After the surrender, you would be able to adjust your Chapter 13 plan to account for the changes in your housing expenses. 

 

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