How Do Chapter 7 and Chapter 13 Help Me Deal with a Foreclosure Threat to My Home Which I Want to Save?
June 3, 2013
Here’s a summary of how the two main kinds of consumer bankruptcy can address the pending foreclosure of your home:
Stated over simplistically, a Chapter 7 helps a little, while Chapter 13 helps a lot. File a Chapter 7 if it helps you enough, a Chapter 13 if what you need is much greater help.
Saving Your Home with Chapter 7
If you already have a foreclosure date scheduled, that usually means that Chapter 7 is not going to help you enough.
A foreclosure around the corner almost certainly means that you are many months behind on your mortgage payment, so that you are many thousands, or even a few tens of thousands, of dollars behind. If you file a Chapter 7 “straight bankruptcy,” that will stop any immediate foreclosure. But then you still need to make arrangements to satisfy your mortgage lender so that it will not just resume the foreclosure as soon as your three-to-four-month-long bankruptcy case is completed. (That foreclosure may or may not be rescheduled depending on the timing of the foreclosure sale and your bankruptcy filing.)
Likely, your mortgage holder will let you keep your home if you agree to 1) resume your regular monthly mortgage payment immediately, and 2) make extra monthly payments large enough to catch up on your mortgage payments within about a year. If you are behind by many thousands or a few tens of thousands of dollars, that extra monthly catch-up payment would usually be so large as to making catching up in time impossible. The exception to this would be the rare case that you have access to money of that amount which would not be under the jurisdiction of the bankruptcy court, such as a family gift in the form of an “early inheritance.”
The other possible exception is if the amount you are behind is relatively small, and your bankruptcy case saves you so much money on a monthly basis through the write-off of other debts that you can afford to pay both your regular mortgage payment and the extra amount needed to catch up in time.
Saving Your Home with Chapter 13
Otherwise, you will need to file a Chapter 13 “adjustment of debts” to keep your home.
A Chapter 13 can be a tremendous tool enabling you to save your home in spite of a foreclosure. In fact it’s a veritable toolbox full of tools. Here are what those tools allow you to do:
Unlike Chapter 7 which largely leaves you at the mercy of your mortgage lender about catching up on your mortgage arrearage, Chapter 13 puts you into the driver’s seat, giving you as much as 5 years to catch up, with a payment program that you propose and is approved by the bankruptcy court.
Slash your other debts so that you can afford your mortgage payments.
“Strip” your second (or third) mortgage, IF your home is not worth as much as your first mortgage balance.
Favor other home-related creditors, beyond your mortgage lender, that you need and often want to pay—tax and support lien holders, and construction and utility lien owners—over most of your other creditors, thereby protecting your home from these special creditors.
Sell your house without the pressure of a foreclosure sale, either a few months after filing the Chapter 13 case, or sometimes even three or four years later when your family is more ready to move and possibly the home value has increased.
Catch up on your property taxes as well, while both protecting your home from tax foreclosure and stopping your mortgage lender from using the fact that you’re behind on your property tax arrearage as an excuse to foreclose.
Stop federal and state income tax liens, child and spousal support liens, and judgment liens from attaching to your home, thereby preventing these creditors from gaining significant legal advantages over you.
If an income tax lien and/or support lien is already attached to your home, take care of these liens in a favorable way while under bankruptcy protection.
Prevent holders of judgment liens from foreclosing on your home.
“Void” most judgment liens and discharge the underlying debts so that they never again attach to your home.
Stop creditors secured by your home who also have rights against any co-signers from pursuing your co-signers.
Conclusion
The decision about how to save your home from a threatened foreclosure is a huge one. Will Chapter 7 gain you enough cash flow so that you can catch up on your mortgage fast enough? Does Chapter 13 come with so many advantages regarding your home that the extra time and expense involved is well worthwhile? Does even Chapter 13, with all of its advantages, still not give you enough help given your limited resources? Are there other alternatives worth considering, either instead of or in conjunction with bankruptcy, to meet your goals?
Let us use our many years of experience helping many people save their homes to explore with you your own options and come up with the best game plan to save your home.