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Chapter 7 if You’re Behind on Your Home or Vehicle

Chapter 7 may or may not give you enough help if you are behind on your home mortgage and/or vehicle loan.

Last week we got into two possible complications for Chapter 7 cases: if you have relatively high income, or if you have non-exempt assets—those that are not protected from creditors. Today we look at what happens if you’re behind on your vehicle or home obligations.

If You Are Current on Your Important Secured Debt(s)

You may be current on your home mortgage but are filing bankruptcy to write-off—“discharge”—your other debts. You’re afraid of not being able to pay your mortgage if your other creditors sue you and garnish your paycheck. If you are current on the mortgage, you would almost certainly be allowed to keep your home.

Same thing with your vehicle loan. If you are current, filing Chapter 7 would very likely make keeping current much easier. So if you want to keep the vehicle and are willing and able to make the payments, “straight bankruptcy” would likely be the best way to go.

If You Are Close Enough to Being Current

You may still be able to keep your home or vehicle under Chapter 7 even if you’re not quite current. On the day you file bankruptcy, your creditors are immediately stopped from taking virtually any collection action against you. That includes any action against the collateral—the home or vehicle—securing the debt.

So you usually have a certain amount of time to catch up. How long you have is different in every situation. But generally, you’re given much more time with a home mortgage than with a vehicle loan.

Not Much Time to get Current on Vehicle Loans

With most vehicle loans you have to get current very fast. That’s usually within about 60 days after you file your Chapter 7 case.

Why? Because if you want to keep the vehicle you have to sign a document called a reaffirmation agreement. And that document has to be agreed upon and filed in the case before it’s closed.

Chapter 7 cases are short—usually closed within about 100 day—not much more than 3 months. So you have to get current, “reaffirm” that you’ll pay the debt, and file that reaffirmation all within that time. And if you don’t, the vehicle lender may ask for court permission to repossess the vehicle.

More Time with Home Mortgages

Most home mortgage lenders give you much more time than that. Most don’t require you to be current before the Chapter 7 case is done. Instead though the help of your bankruptcy lawyer you would enter into a “forbearance agreement.” The lender agrees not to start (or continue) a foreclosure of the home as long as keep current on future payments and catch up on previous missed payments within a certain amount of time.

That may work out just fine. You may be only a payment or two behind on the mortgage. Discharging your other debts may improve your cash flow enough to be able to get current fast enough. So you’d pay extra in catch-up payments each month until you were current. You’d be rid of all or most of your other debts, and current on your mortgage. Mission accomplished.

If You Can’t Get Current Fast Enough

Being a bit behind on a home mortgage or vehicle loan makes a Chapter 7 case a bit more complicated. Being more behind makes your Chapter 7 more complicated. There’s more risk that you would not be able to satisfy your home/vehicle lender fast enough to save your home/vehicle. And if you are too far behind, a Chapter 7 case will simply not be the right option for you.

Chapter 13 Gives You Tons More Time

The solution to not having enough catch-up time is filing a Chapter 13 “adjustment of debts” case instead.

Without going into detail about this here, Chapter 13 would usually give you many months to catch up on a vehicle loan. Or even a few years. Or under some circumstances you wouldn’t have to catch up at all!

With a home mortgage, you’d have as long as 5 years to catch up.

Conclusion

Chapter 7 cases get complicated if you want to keep a home or vehicle and you’re behind on payments. If you’re too far behind, you’ll need a Chapter 13 case instead. Then you’ll have much more time to catch up.