Chapter 13 give you years to catch up on your mortgage, may allow you to not pay your 2nd mortgage, & handles tax & support liens very well.
You can stop a foreclosure—including a “judicial” one—with a regular bankruptcy, but with this kind of foreclosure the timing is crucial.
Our last two blog posts described the judicial foreclosure procedure and the limited help that Chapter 7 “straight bankruptcy” can provide if your home is faced with such a foreclosure. Particularly if you want to keep the home—forever or for just a couple years—Chapter 13 “adjustment of debts” gives you many powerful tools with which to fight a foreclosure. That’s what this blog post is about.
The Same “Automatic Stay” But Much Longer Lasting
The first disadvantage of Chapter 7 is that even in best of circumstances, after stopping a foreclosure with the filing of the case, nothing stops the lender from resuming the foreclosure about three months thereafter, at the time when the discharge is usually entered in the case and the automatic stay terminates. A Chapter 13, in contrast, lasts 3 to 5 years, with the protection of the automatic stay in effect throughout that period.
A Long Time to Catch Up on Mortgage Arrears
In a Chapter 7 case the protection from the judicial foreclosure can last even less than three months if the lender simply asks the court for permission to continue the foreclosure. Unless you have the means to catch up on the payments you are behind on—which can easily amount to tens of thousands of dollars by then—quite quickly, the lender will likely get that permission.
In contrast under Chapter 13, you have the length of the case—3 to 5 years—to catch up on the arrears, and the court will generally not give the lender permission to resume the foreclosure if your “plan” shows that you will catch up within that time (and if you in fact then comply with your plan).
Possible Stripping of Second Mortgage
If you owe a second mortgage, and your home is worth no more than the balance on your first mortgage, you would likely be able to stop paying the second mortgage payments, and could avoid paying all or most of that second mortgage balance. Not only would this save you a significant amount of money each month, it would make your home worth much closer to what you owe on it, making hanging onto it a much better economic choice, both for the short run and the long run.
Better Way to Catch Up on Property Taxes
Chapter 7 does not give you any mechanism to help if you fall behind on property taxes. That gives your foreclosing mortgage lender a whole separate justification for foreclosing, because your mortgage documents almost always states that you cannot fall behind on property taxes.
But Chapter 13 gives you the same 3 to 5 years to catch up on any property tax arrearage. So your lender can’t get permission to foreclose on this basis as long as you show in your plan that you are catching up on the property taxes (and then you in fact fulfill the terms of the plan).
Better Ways of Dealing with Tax and Support Liens
Income tax liens and child/spousal support liens on your home are not helped in a Chapter 7 case.
Although the IRS and state tax authorities are stopped for the few months that the Chapter 7 automatic stay is in effect (and they generally do not ask for “relief from stay” to shorten that time period), as soon as your case is over they can take all collection actions against you, including foreclosing (“levying”) on a tax lien against your home.
Much worse, the automatic stay does NOT protect you at all from ex-spouses and support enforcement agencies pursuing you for either current or past-due support. That means that they can foreclose on your home through a previously recorded support lien even DURING your Chapter 7 case, and take any other collection action regardless of your bankruptcy filing.
Chapter 13 is in great contrast to both.
It gives you 3 to 5 years of protection from the federal and state tax authorities—preventing both the foreclosure of any prior tax liens against your home as well as the recording of any new tax liens throughout that time. Chapter 13 provides an excellent mechanism for valuing and paying the tax lien, so that it is released before the case is over. And it also gives you the full length of the plan to pay off any newer taxes that can’t be discharged, so that you exit the case owing no taxes, nothing for the IRS or state to put any future tax lien on.
Chapter 13 provides the best tool for dealing with child and/or spousal support arrearage, because it stops the often very aggressive actions of an ex-spouse or support enforcement agency like nothing else can. As with other “priority” debts, you have the whole 3-to-5-year period to catch up. And when it is paid off, your ex-spouse or support enforcement agency must release the lien against your home.
As mentioned in the last blog post about Chapter 7 and judicial foreclosures, for certain practical reasons, mortgage lenders may be more aggressive in bankruptcy court when they are in the midst of a judicial foreclosure instead of a non-judicial one. That may be all the more reason to use the many strong tools of Chapter 13 when you want to fight back and save your home.