Chapter 13 “adjustment of debts” provides a set of tools, each one solving a different problem that could otherwise lead to losing your home.
Here’s a summary of today’s blog post:
These 5 tools include: 1) being able to catch up on your mortgage arrearage flexibly, 2) “striping” your second (or third) mortgage off your home title, 3) preventing the recording of income tax liens on your home, 4) satisfying already recorded tax liens inexpensively and safely, and 5) slashing other debt obligations so that you can afford to pay debts on your home.
1. Catch up On Past Due Mortgage Payments
You have the length of your Chapter 13 payment plan—generally 3 to 5 years—to pay your missed mortgage payments.
Not only do you have this length of time—much longer than most mortgage lenders would allow voluntarily—you also have a great deal of flexibility in how and when it’s paid during that time. For example, depending on the amount of equity in your home and other factors, you may be able to pay other even more urgent creditors ahead of or at the same time as you’re catching up on the mortgage, such as vehicle and child/spousal support arrearages. You may even be able to catch up through a refinancing, perhaps even after waiting a couple years for more equity to build up in your home.
And this all works because during this entire catch-up period your home is protected from foreclosure and most other collection efforts, as long as you follow the terms of the payment plan that you and your attorney propose and the bankruptcy court approves. If you do successfully follow your plan, you will be current on your mortgage by the time you finish your case.
2. “Strip” Second Mortgage off Your Title
If your home is worth no more than the balance on your first mortgage, then a second mortgage can be “stripped” of its lien against your home. This means that as soon as your Chapter 13 case were filed, you would no longer need to make the monthly second mortgage payments. That would immediately reduce the monthly cost of keeping your home.
Then the entire balance owed on your second mortgage is treated in your Chapter 13 case like a “general unsecured” debt—just like your lowest priority debts like medical bills and credit cards. This means that the second mortgage balance is lumped in with all of these other debts and then that pool of debt is paid only as much as you can afford to pay during the time that you are in the payment plan. This would be AFTER catching up on your first mortgage and other higher priority debts are paid in full. Often the second mortgage balance and other “general unsecured” debts are paid only pennies on the dollar, and sometimes are even paid nothing. And then at the end of your successful payment plan whatever portion of the second mortgage balance is not paid is permanently written off. That brings you much closer to building equity in your home.
3. Prevent Recording of Income Tax Liens
Filing either a Chapter 7 or Chapter 13 case prevents federal and state income tax liens from attaching to your home while the cases are open. But Chapter 7’s protection lasts only a few months. That means if you owe any income tax that would not be discharged (legally written off) in a Chapter 7 case—usually those from recent tax years—could result in a tax lien being recorded against your home as soon as the Chapter 7 case is over. That’s usually only about three or four months after filing the case. This gives the IRS or other taxing authorities a lot of leverage against you and puts your house in jeopardy.
If instead you file a Chapter 13 case before a tax lien is recorded, the protection against a tax lien lasts for years, giving you time to pay the underlying tax under that protection. The tax would be paid off in your Chapter 13 case as a “priority” debt, usually without any more accruing interest and penalties, and under very flexible terms, without you needing to worry about the IRS/state recording a tax lien throughout that time.
4. Satisfy Recorded Income Tax Liens
If at the time of your Chapter 13 case your home already has an unpaid income tax lien against it, the IRS/state will be stopped from taking any action on that lien against your home. If that lien was recorded on a tax that CANNOT be written off in bankruptcy, Chapter 13 both provides you a mechanism to pay these inescapable debts on a reasonable timetable and protects you and your home while you do so. If that lien was recorded on a tax that CAN be written off in bankruptcy (usually from older tax years), then often you need to pay only pennies on the dollar on that tax before the remaining amount is written off and the tax lien is released.
5. Slash Other Debt Obligations
Chapter 13 reduces what you must pay on your other debt obligations, often radically so. Most debts secured by your home are allowed to be prioritized in your court-approved payment plan, while many other debts are paid less, and in some cases are paid nothing. As a result, you would have much more money to pay your mortgage and property taxes, and perhaps other obligations related to your home.
Chapter 13 can sometimes even give more room in your budget to pay towards your home than if you had filed a Chapter 7 case. That’s because if you owe certain kinds of debts that would not be written off in a Chapter 7 case—such as an ongoing vehicle loan, certain taxes, child or spousal support arrears, and most student loans—Chapter 13 could enable you to pay less each month on those obligations, leaving more money for your home.