When could Chapter 7 “straight bankruptcy” stop a foreclosure, enabling you to keep your home without a more complicated Chapter 13 case?
Do You Need a Chapter 13 Case?
The three-to-five-year Chapter 13 option is often considered the best bankruptcy option if you want to keep a home under threat of foreclosure. It provides a significant number of tools to help you reach that goal. But sometimes you don’t need those tools, and the much simpler Chapter 7 could be better overall for you.
Besides the length of a Chapter 13 case, it’s a risky option because you must successfully complete it in order to get a discharge (legal write-off) of any of your debts. Much can change in three to five years. Chapter 13 is designed to be flexible, but it has its limits. So starting a Chapter 13 case involves risk that would be good to avoid if Chapter 7 will allow you to keep your home.
When Chapter 7 Could Work
Speaking very generally, you do not need the extra help of Chapter 13 under two circumstances:
1. If after filing a Chapter 7 case you would be able to catch up on whatever you owe in mortgage arrearage (plus any back property taxes) within about a year:
If you are behind on your mortgage and you file a Chapter 7 case, your mortgage lender will likely give you a certain amount of time to get current. How much time you’ll have depends on your mortgage lender and the facts of your particular situation. Usually you are given about a year to get current by consistently making your regular payment on time plus an extra amount—often quite a large extra monthly amount. To learn out how much time you would likely have to catch up, talk with your attorney, who either has some direct prior experience with your lender and/or can find out by contacting it.
At that point a very careful analysis needs to be made about how much extra you can pay each month—once you file a Chapter 7 case and no longer need to be paying the debts that you will be writing off. From this you can find out about how long it would take you to get current, and whether you could realistically do so.
2. If you do not have a second mortgage, or you do but your house is worth at least the amount of the combined balances of the first and second mortgages:
Only under Chapter 13 (NOT Chapter 7) you are able to “strip” the entire second mortgage off your home’s title if the house’s value is less than the balance of your first mortgage. In other words, all of your home’s equity is encumbered by the first mortgage. Since this can save you so much money—usually tens of thousands of dollars, or even sometimes hundreds of thousands over time when you count future interest—anybody in this situation should seriously consider Chapter 13.
Here’s how a successful Chapter 7 would work in practice.
Donna and Bill are married and in their early 50s. Bill was in an automobile accident three years ago, leaving him temporarily disabled and unable to work for 15 months. The accident was the fault of the other driver, who had no insurance or has no assets worth pursuing. Bill’s own uninsured insurance benefits paid out its coverage limits, leaving Bill personally liable for $89,000 in medical bills. During this period they piled up credit card debt totaling $36,000 because they simply had no other way to feed themselves and pay their health insurance premiums. So they owe $125,000 among those two sets of debts.
During Bill’s rehabilitation, they fell six full payments behind on their modest mortgage payments of $833 per month, a total of $5,000 behind. Their lender has begun to threaten a foreclosure, although no date has been set. There is no second mortgage.
Many of their medical bills have gone to collections, and a number of these have resulted in lawsuits against them, judgments, and liens on their home. One just began garnishing Bill’s paycheck. Donna and Bill have also missed payments on most of their credit cards, with lawsuits around the corner there as well.
They could afford the house payments now, and then some, but not with all of the medical and credit card debts and the present and anticipated garnishments.
The Chapter 7 Solution
When Donna and Bill meet with an experienced bankruptcy attorney, she runs some calculations and determines that, if the garnishment was stopped and they did not have to pay the $125,000 in medical and credit card debts, with their present income Donna and Bill could easily make the regular mortgage payments. Plus, in looking carefully at their budget, they decide that for the next year or so they could realistically pay an extra $500 per month towards their mortgage arrearage. That would catch up their arrearage in 10 months. Their attorney tells them that in her experience their particular mortgage lender has a history of accepting “forbearance agreements” from homeowners in their situation, giving them up to a year to catch up on their mortgage.
So Donna and Bill file a Chapter 7 case, immediately stopping the garnishment. Under Chapter 7 their attorney succeeds in “voiding”—getting rid of—the judgment liens on their house. She also negotiates a forbearance agreement with their mortgage lender, so that it agrees not to foreclose as long as Donna and Bill make the next 10 months of regular payments on time, plus pay an extra $500 per month during those same 10 months. A little more than three months after their Chapter 7 is filed, the bankruptcy court grants them a discharge of all of their medical and credit card debts and closes the case. Another seven months later, Donna and Bill finish paying off their mortgage arrears. They are then current on their mortgage and are otherwise completely debt-free.