You may decide not to fight a foreclosure sale but just need more time to move. Or are about to sell but need a bit more time to close.
Chapter 13 Is Often the Better Option for Keeping Your Home
If you are significantly behind on your mortgage, and you want to keep your home, Chapter 13 “adjustment of debts” is often the best way to go. Also, if you have a second or third mortgage, or a state of federal income tax lien, or child/spousal support lien against your home, Chapter 13 can also be more helpful than Chapter 7 “straight bankruptcy.” Chapter 13 provides some powerful legal tools that can make it possible to keep your home when doing so would otherwise be impossible.
But Chapter 7 Is Sometimes Enough
But you may not need those extra legal tools of Chapter 13. You may be surrendering the house soon anyway, or you may only need a modest amount of help to be able to keep the house. Chapter 13 can be great, but there’s no point to entering into a three-to-five year payment plan if the usually much simpler Chapter 7 bankruptcy would give you sufficient help.
If You Are Letting Your House Go to Your Lender
If you are on the brink of a foreclosure sale, the filing of a Chapter 7 case stops that foreclosure just as quickly as would a Chapter 13 filing. If you just need a relatively short extra amount of time to move—a matter of a few weeks or a couple months—Chapter 7 case could be enough.
It could be the most sensible option if you’ve decided to let the house go, but need a little more time to pull together the money to make the move. Or you may need a couple more months before your kids’ school year is over, or are waiting for your next housing to become available. In these kinds of situations, Chapter 7 could well be the best choice.
If You Are Selling the House
If you are right on the brink of closing a sale of your house, including a short sale, you can file a Chapter 7 case to stop an approaching foreclosure. This will buy you some time—although how much depends on all the circumstances (and may be difficult to predict because it’s up to the whim of your lender). But be aware filing a Chapter 7 case in the midst of a sale can complicate the sale as well. Your bankruptcy trustee may have some say about what happens to the sale, although that would not be a problem if you have no equity or what you have is protected by the homestead exemption. A bankruptcy filing can also raise concerns with your intended buyer, so you or your attorney will need to give the appropriate reassurances.
If You Need to Stop Other Kinds of Foreclosures
A Chapter 7 filing stops not only foreclosures by your mortgage lender, but also by the county tax assessor for unpaid property taxes, by the IRS on tax liens, or creditors who sued you and got a judgment lien attached to your house. But remember again that this protection only lasts a few months, or even shorter if the creditor is aggressive. However, under the right circumstances, it may be enough time either to discharge (legally write off) the underlying debt—such as with a credit card debt resulting in a judgment lien—or to make payment arrangements with creditors on debts that do not get discharged—such as with the IRS or Oregon Department of Revenue.
If You Need to Stop Liens from Attaching to Your Home
Chapter 7 can also prevent—again at least temporarily—most kinds of liens from attaching to your home. If it is a debt that is going to be discharged in your Chapter 7 case, stopping the lien could make a difference of tens of thousands of dollars.
For example, if you have some equity in your home and owe the IRS a substantial amount of income taxes from a number of years ago, the IRS could record a tax lien against your home. If you filed a Chapter 7 case before that were to happen, you would be able to discharge the tax debt if it meets certain conditions, not paying a dime of it. You would be allowed to preserve the equity in your home through the homestead exemption. However, if you delayed filing the Chapter 7 case until after the IRS filed a tax lien, you would likely have to pay that debt out of the equity in the house because the homestead exemption does not protect against tax liens.
Just How Much Time Does a Chapter 7 Filing Buy?
There is not clear answer to this question, mostly because it depends on how aggressively your mortgage lender reacts to your bankruptcy filing. If it is very aggressive, you may not gain more than a month or so. If it is not, you may gain the three or so months that it takes a simple Chapter 7 case to complete, or sometimes even more time. An experienced bankruptcy attorney may well be able to give you a better estimate based on the behavior of your mortgage lender in other recent cases.