As you consider whether filing a Chapter 13 “adjustment of debts” is the right choice for you, it’s smart to know what happens if down the line you aren’t able to make the plan payments.
The Power and Limits of Chapter 13
The Chapter 13 type of bankruptcy can be an almost unbelievably good way to save your home. Besides reducing or sometimes even eliminating most or all of your other debts so that you can focus on paying your home, it can both reduce what you pay on your home and give you years to catch up on home obligations that need to be paid, including back payments on your mortgage itself. Chapter 13, like Chapter 7, can get rid of judgment liens, but unlike Chapter 7 it can also sometimes eliminate or vastly reduce what you must pay on a second mortgage. It can protect you from potentially very aggressive creditors with liens on your home—such as the IRS, state and county tax agencies, home repair contractors, and even your ex-spouse and support enforcement agencies—while you pay them off over time, in some cases at reduced amounts than would be otherwise.
But there are definitely still limits on what Chapter 13 can do. For example it cannot reduce your first mortgage payment or its balance, even if your home is not worth what you owe on it. And if you are behind on your mortgage payments, you will still have to make up those missed payments eventually, while resuming or continuing to make your regular monthly payments, AND keeping current on your property taxes and insurance.
So, Chapter 13 is often a tremendously good tool for keep your home, but it only goes so far. In deciding whether it’s right for you, it’s sensible for you to ask whether you would have a successful case. If you pay what your court-approved Chapter 13 plan provides, you will finish the plan and exit bankruptcy current on your house and otherwise likely debt-free. But what happens in Chapter 13 if you are not able to make your plan payments perfectly, if your circumstances change significantly?
The Flexibility of Chapter 13
Our last blog considered “Changes in Circumstances During Your Chapter 13 Case and What You Can Do About Them.” So please read that if you haven’t already. This blog is about that same question but focused on your home. You have the options of modifying your Chapter 13 plan, dismissing your case (perhaps so that you can start over with more time), converting into Chapter 7, and getting a hardship discharge.
Let’s look at these options from two perspectives: 1) changes in your circumstances in which you still want to keep your house; 2) changes resulting in letting go of your house.
Flexibility Allowing You to Still Keep Your Home
If after your Chapter 13 plan is approved by the bankruptcy court you have a reduction in your income or a significant increase in your expenses so that you cannot pay your full plan payment and your other financial obligations, this can often be solved by changing the terms of your plan. How much you would be able to reduce the plan payments depends on all your circumstances.
Chapter 13 plans can differ radically from one person to the next, so it is impossible to generalize. But to give you just a taste how this can work, imagine a situation in which a husband and wife both work and together are making a decent income. But they needed to file a Chapter 13 case because they’d fallen behind on their mortgage because of the husband’s prior job loss and gap in income, followed by a reduction in income with the new job. They had a lot of other debt, and so their 3-year Chapter 13 plan was designed to catch up their mortgage and pay 50% of their other debts. Two years into their case the wife’s income is significantly reduced so that they can no longer afford their plan payment. But they want to hang onto their home if possible because they have school-aged children in the local schools. Most likely that plan payment could be significantly reduced by stretching out the plan an additional two years (a total of five) and if necessary reducing the percentage being paid to the other creditors.
Flexibility Allowing You to Let Go of Your Home
Sometimes people enter into a Chapter 13 case specifically to be able to stay in their home for a limited time. If their house is under foreclosure, they may just want or need to stay a matter of a few months longer than would be possible under Chapter 7. Or they may have the intention of selling or possibly letting go of the house a few years later, such as when their child finishes high school or when they are ready to retire. Or sometimes people want to try to keep their house, but realize that doing so depends on future circumstances that are not in their control.
In these situations it’s good to know that Chapter 13 can, after buying you time—either a few months or often a few years—enable you to sell or surrender your home in ways that are advantageous for you.
In the unusual situation that you have no debts other than your home, or none that are troublesome, at virtually any time you can dismiss (close) your Chapter 13 case and then sell or surrender your home shortly thereafter.
In the much more likely scenario that you do have other debts, your Chapter 13 case can be converted into a Chapter 7 case, with the timing of the sale or surrender of the home depending on the circumstances of the case. This way your other debts would be discharged (written off) and you’d be left with a fresh start.
Finally, in the unusual situation where you would qualify for a “hardship discharge,” that could be done in conjunction with a sale or surrender of the house as well, also leaving you with a fresh start.