Here are 5 additional tools by which Chapter 13 saves your home, each one neatly solving a different challenge.
Here’s a summary of today’s blog post:
Adding to the 5 tools in our last blog post, today’s 5 include: 6) protecting your home equity if it’s greater than the homestead exemption, 7) giving you much more time to live in your home before selling it, 8) dealing effectively with child/spousal support liens against your home, 9) resolving an income tax lien on dischargeable income taxes, and 10) preventing foreclosure from overdue property taxes.
6. Avoid a Chapter 7 Trustee from Taking Your Home for Having Too Much Equity
If you have more equity in your home than the homestead exemption allows, you risk losing your home if you file a Chapter 7 “straight bankruptcy” case. The homestead exemption amount can differ state to state. Chapter 7 trustees have a lot of discretion about pursuing assets, and so it’s difficult to predict how aggressive yours will be about your home. If the amount of your equity is anywhere close to the homestead exemption maximum, you take a risk in filing a Chapter 7 case.
In contrast, Chapter 13 “adjustment of debts” provides a much more predictable procedure for determining the value of a home, one which relies less on the whim of a trustee. And more importantly Chapter 13 provides a mechanism to protect the value of the home if it is in excess of the homestead exemption. That mechanism often involves paying extra to your creditors over the course of your overall payment plan in return for being able to keep your home and its too-much equity. But in some cases you don’t have to pay anything extra—overall the creditors just need to get paid no less than what they would have received in a hypothetical Chapter 7 “liquidation” case.
7. Get Lots More Time to Sell Your Home
If you have decided to sell your home but are now or expect soon to be under threat of foreclosure, Chapter 13 usually gives you much more time to sell than would a Chapter 7 filing. That means you’d have more market exposure, which gives you a better chance at selling at a better price. That’s especially true if you are being forced to sell during a traditionally slower time of the year, or are trying to sell on a short sale (in which the house is worth less than the amount of the mortgage(s) against it).
If you are behind on your mortgage payments and have a foreclosure scheduled, filing a Chapter 7 case will usually only buy you an extra three months or so. It may even get you less time if the creditor decides it wants to put pressure on you. Instead, in a Chapter 13 case you can usually stay in the home by making your regular monthly mortgage payments plus some progress towards paying the arrearage as you wait to sell your home. Or if there is enough equity in the property you likely wouldn’t have to pay any of the arrearage until the house sold and the entire balance owed to the mortgage lender would be paid from the proceeds of the sale.
8. Deal Effectively with a Child/Spousal Support Lien against Your Home
Filing a Chapter 7 case does nothing to stop collection efforts against you if you are behind on your child or spousal support obligations. This could be a problem for your home in two ways, both of which are solved by instead filing a Chapter 13 case.
First, support obligations usually turn into liens against the real estate you own, including your home. This gives your ex-spouse the ability to force the sale of your home to pay the support arrearage.
So assuming that a lien for unpaid support was already attached to your home before your bankruptcy is filed, Chapter 13 would stop the execution of that lien as long as you comply with your court-approved payment plan. Your plan must show how you are going to pay that support arrearage before your case is completed, and you must stay current on those payment obligations (plus any ongoing support payments). But as long as you do all this, the support lien cannot be executed against your home. Instead after the underlying support debt is paid off through your Chapter 13 payment plan, the lien would be released, with no further risk to your home.
Second, if no support lien has been placed yet on your home, Chapter 13 would prevent that from happening. Instead you’d have the opportunity to pay off the support arrearage while under bankruptcy protection, avoiding the need for a lien to be placed on your home.
9. Deal with a Recorded Tax Lien on a Dischargeable Income Tax
You may owe an income tax for which a tax lien has been recorded against your home. If the underlying tax is old enough and meets other conditions to be discharged (legally written off in bankruptcy), then dealing with the lien is likely much better under Chapter 13 than 7. Depending on the amount of equity you have in your home, under Chapter 7 the IRS or other tax authorities may well not release the tax lien even after the underlying tax debt is discharged. You may need to pay the tax anyway, or a substantial amount of it, to get the lien released.
In a Chapter 13 case, in contrast, there is an efficient court procedure for determining the value of that lien, and for paying it. As a result, at the completion of your case the tax debt is discharged and its lien is released.
10. Past Due Property Taxes Also Handled Well under Chapter 13.
If you are paying your home’s property taxes as part of your mortgage payment, and you’ve fallen well behind on those mortgage payments, your lender may have paid some of your past due property taxes with its own money. It does that to avoid a property tax foreclosure by the county or other tax authority, through which it would lose its own rights to your home (as would you).
If the lender did pay the past-due taxes, it would have added the amount of taxes paid to the total amount that you are behind to it. Your contract with your lender almost certainly allows it to do that. Then you would have the length of your Chapter 13 plan to pay your lender that tax amount, in the same way that you would catch up on the back mortgage payments.
If your mortgage lender hasn’t yet paid an overdue property tax, you would pay that tax directly to the county or other tax authority over time in your Chapter 13 payment plan. Your home would be protected from tax foreclosure in the meantime. So your lender would not be able to use the overdue property tax as justification to do its own foreclosure, as long as you make consistent progress on catching up, as well as keep current on new property taxes as they come due during your case (as well as kept up on the mortgage itself).
In the same way, if you pay your property taxes paid directly to the county or other tax authority (not through your mortgage lender), and you’ve fallen behind, your Chapter 13 plan would include payments to that tax authority until you were caught up.