Under Chapter 13 you can delay your home sale by organizing your payment plan around that sale, or by leaving your sale more open-ended.
In our last blog post we described briefly how Chapter 13 can often give you tremendous flexibility about the timing of the sale of your home. Here we expand on your options.
A Scheduled Home Sale
If you definitely plan on selling your home and you know when you want to do so, you can build your Chapter 13 plan around that sale. Depending on your situation, you may be able to schedule selling your home anytime during the following 5 years, the maximum length of a Chapter 13 payment plan.
The main benefit of incorporating your intended sale into your formal plan is that doing so allows you to pay certain creditors out of the expected proceeds of the sale. That usually allows you to pay less to creditors during the rest of your case.
For example, if at the time you file your case you are $10,000 behind on the first mortgage and filed the Chapter 13 case to prevent a foreclosure, you would normally have to catch up on all of that $10,000 through monthly payments during the 3-to-5-year case. But if you schedule the intended home sale for, say, two and a half years after the case is filed, you would often be able to pay all or most of that $10,000 out of the proceeds of the sale. This assumes that there is good indication that you will have sufficient equity in the home at the time of the sale to pay that $10,000 or so then.
There are two major advantages of this.
First, you could pay other important and/or time-sensitive debts instead during the time before you sell your home. For example, if you fell behind on child or spousal support payments, you could catch that up and avoid the very aggressive collection efforts of your ex-spouse or the support enforcement authorities. Or if you qualify for “cramdown” of your vehicle loan, you could all or most of your vehicle loan.
And second, paying your home arrearage through the expected sale proceeds allows you to keep your monthly Chapter 13 plan payment lower. Because your budget will allow you to pay only so much monthly into your plan, being able to pay most of the mortgage arrearage out of the later expected home sale may enable you to afford to save your home through Chapter 13.
A Possible Home Sale
But you may not be sure if you want to sell your home. And you may not have a financial need to structure your Chapter 13 plan around the anticipated proceeds of the sale in the way just described. So at the beginning of your case your formal payment plan would be designed around the assumption that you would keep your home. But you would be aware that you could sell your home later during the case, depending on how your personal and financial life evolved in the meantime.
The benefit here is that you keep your options open. If you would be catching up on your first mortgage during this time, and maybe the property taxes as well, and the value of your home would be increasing, your home equity would be increasing at an accelerated rate. If doing so fits into your life, you could sell the home at some point in your case, and put that equity to good use.
You may be able to sell the home but remain in your Chapter 13 case to complete it after amending your monthly payment plan, likely with lower payments.
Or you may be able to use the proceeds of the home sale to pay off your Chapter 13 plan. And if that’s structured and timed right, you would often not have to pay any more to your creditors than if you had not sold the home.
Selling After Converting to a Chapter 7 Case
For example, if your initial goal is to stay in your home because of family or job reasons, but those reasons shift because of a divorce or job loss, you could convert into a Chapter 7 case and sell your home right after that was completed 3 or 4 months later.
Or if one of your motivations in filing a Chapter 13 case was to sell after your home increased in value, you might convert into a Chapter 7 case if after a year or two the market was not doing as well as you’d hoped.
Selling After Your Chapter 13 Case is Finished
You would also have the option of waiting until your Chapter 13 case is finished and sell your home after that. The big benefit here is at that point you would likely be well positioned to sell your home. If you “stripped” a second or third mortgage that would no longer be on your title. Judgment liens would be also cleaned off the title, as well as any income tax liens. You would have had the length of your case to increase the value of your home. And you would likely owe no debts except the home mortgage. You could sell your home, clear yourself of any remaining debt and be fully debt-free.