Chapter 13 is appropriately known as the “home-saving” bankruptcy option. It comes with many, many tools for helping homeowners keep their homes in the face of foreclosure and other financial challenges. But one lesser-known opportunity that Chapter 13 may give you is to purposely hold onto your home for a limited time, with the clearly stated intention to sell it after that period of time. This opportunity is becoming even more important as the local residential real estate market is finally showing some sustained increases in value. So personal reasons for you to stay in your home for a certain length of time are now coming together with this financial motivation.
Chapter 13 and Your Home
The Chapter 13 “adjustment of debts” is a 3-to-5-year procedure that in many circumstances helps people stay permanently in their home, even in the face of foreclosure. It does so by, among many other mechanisms, allowing the homeowners to catch up on their mortgage arrearage over that 3-to-5-year period. This extended length of time keeps the catch-up amount more reasonable than having to do so within a year or so, as is usually the limit under Chapter 7—depending largely on the whim of the mortgage lender. In contrast, under Chapter 13 the amount the homeowner pays each month for all of his or her obligations is based on ability to pay.
Chapter 13 also may allow the homeowner to “strip” a second or third mortgage off the home’s title, resulting in not having to pay that monthly payment and usually paying little or nothing on that mortgage ever again. Not only can this shave hundreds of dollars off the monthly cost of the home, but considering the future interest savings, this can save the homeowner hundreds of thousands of dollars over the life of the home.
Other debts secured by the home—income taxes with tax liens, real property and homeowner association liens, construction liens, judgment liens, those for child and spousal support—all of these can be favorably handled under Chapter 13.
Buying Just a Little Time Before Selling Your Home
If you are facing a foreclosure, or some other creditor pressure—related to your home or not—and you are either actively selling your home or want to do so right away, filing bankruptcy can buy you the time to sell your home appropriately. It’s a basic economic principle that more market exposure will generally get you a better sale price, while a desperation sale will do the opposite. So either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” will buy you some time.
If you just need a couple months or so, a Chapter 7 may be enough. But make sure you talk with a highly experienced bankruptcy attorney about this, because a Chapter 7 can cause some complications in a pending sale (which are beyond the scope of today’s blog).
A Chapter 13 may well be worthwhile even with a relatively quick sale expected. It gives advantages not available under Chapter 7—such as the second/third mortgage “stripping” referred to above—and usually buys more time and provides more flexibility.
Not Keeping Your Home, But Not Selling It Right Away Either
Chapter 13 shows its real strength and ingenuity in a purposely delayed sale.
First imagine how this could be beneficial in practical terms. You may be two, three years from a son or daughter finishing the local high school, or from retirement, or from when you can downsize your home. You may be anticipating a move after finishing a present job or retraining. Or you may have some uncertainties in future income or expenses making you currently unsure about your ability or desire to keep your present home. In these and similar situations it may be extremely helpful to be in a legal procedure that lets you do two things:
1) when your intentions to sell on a relatively firm timetable are clear from the beginning, creating a financial plan around that timetable; and
2) when your intentions aren’t clear about whether and/or when to sell because you need to see how life plays itself out, entering a financial plan that can adjust to changes as they arise.
Selling on a Timetable in Chapter 13
Chapter 13 plans can often be successfully structured around an intended future home sale date. In fact, doing so can be better both for your intended sale and also for your Chapter 13 case.
Going this route can be better for your intended sale because through the power of Chapter 13 you can do a number of things to prepare for that sale and make it much more favorable for you. It may give you more time to do a mortgage modification. Getting rid of judgment and other liens through Chapter 13 could increase the proceeds of sale after paying off the mortgage(s). This could enable the sale to happen—by providing enough money to pay off the remaining liens. Or else it could result in more money being available from the sale proceeds to pay into the Chapter 13 plan. This in turn could either reduce how much you would have to pay during the rest of the case, and/or could even pay off the plan through those proceeds.
Relatedly, a Chapter 13 plan with an intended future home sale structured within it can help your case by—as just stated, reducing how much you would have to pay during the case, both in arrearage on your mortgage(s) and to all your other creditors. There just needs to be a reasonable expectation of proceeds of sale to pay off the remaining arrearage and/or to contribute to or pay off the rest of your obligations in the Chapter 13 case. Admittedly, predicting home prices two or three years from now is easier said than done in today’s still touchy residential housing market, but Chapter 13 nevertheless gives you this opportunity.
Selling Only Maybe, and Without a Timetable in Chapter 13
Chapter 13s are flexible, within limits. Given the infinite potential fact scenarios, not much more can be said here about how much and in what ways any particular Chapter 13 case could bend to adjust to a sale of the homeowner’s home during the case, when that event was not formally incorporated into the plan. Just be sure to make your concerns and intentions clear to your attorney from the very beginning, even if they are still relatively vague to you now.
The Bottom Line
Chapter 13 is not just for saving your home permanently. It’s often flexible enough to deal with your intended or possible sale of your home during the case, whether that sale is explicitly incorporated into your Chapter 13 plan or is just a possibility to address later. Again, be very open with your attorney about this so that he or she can structure your case in the best possible way to benefit you.