Chapter 7 and Chapter 13–Home Mortgage Overview
Oct. 12, 2015
How do these two consumer options help with your home mortgage(s)?
Chapter 7 “Straight Bankruptcy”
A Chapter 7 case usually lasts about 3-4 months. It doesn’t reduce your monthly mortgage payment, and doesn’t directly help you deal with your mortgage lender if you’re behind.
Instead through Chapter 7 most or all of your other debts are gotten rid of so that you are better able to catch up if you’re behind, and can better afford your mortgage and other home-related debts and expenses overall.
Chapter 13 “Adjustment of Debts”
A Chapter 13 case usually takes 3 to 5 years. That’s because it involves putting together and then executing on a court-approved monthly payment plan through which you usually pay a portion of your debts, and often only a small portion.
Although your first mortgage payment can’t be reduced, in some circumstances you would not need to pay a second (or third) mortgage payment. If behind on the mortgage you’d have the 3 to 5-year length of the payment plan to catch up.
You can better afford your mortgage and other home-related debts and expenses for two reasons: because your other debts are usually radically reduced, and because you are protected for an extended time from special creditors while you pay them. Those special creditors include home-related ones like your property tax agency, and also ones not directly related to your home like your child/spousal support arrearage and income taxes.
How Much Protection You Need
Both Chapter 7 and 13 stop a scheduled foreclosure sale through the power of the “automatic stay,” which prevents most creditor actions from acting against you and your home from the moment your bankruptcy case is filed.
The difference is how long that protection lasts.
SHORT Protection from Foreclosure and Other Action by Your Mortgage Lender
Sometimes you only need that protection for a short time. You may have struggled to stay current on your home mortgage(s) and just need relief from your other debts so that you can keep current. You may have decided to move away from the house and just need a few more months to save moving costs and first/last month’s rent. You may want to stay, are behind on the mortgage, but just need to work out a “forbearance agreement” with your mortgage lender to catch up during the next year or so.
For these situations the relatively short length of protection provided by Chapter 7 would likely be appropriate.
LONG Protection from Foreclosure and Other Action by Your Mortgage Lender
But you would need longer and more powerful protection in the following situations:
You are further behind on your mortgage than you can catch up within a time period that your mortgage lender would allow in a voluntary “forbearance agreement.”
You are also behind on property taxes and need a way to catch up on both the mortgage and the taxes while being protected from foreclosure by both.
You can’t afford to catch up or simply to pay your mortgage because of special debts that would not be written off (“discharged”) in a Chapter 7 case, and so you need to pay those special debts over an extended time while being protected from liens and other harm those special creditors could inflict. Examples are such special debts are recent income taxes, child/spousal support arrearage, and student loans.
You believe you want to keep your home for a few years, and then maybe sell it at the right time for you. You need the flexibility of a payment plan and protection from your creditors that allows you to put off selling your home for now, and provides some flexibility as your work/family/personal plans change.
For these situations the relatively long protection provided by Chapter 13 would likely be more appropriate.