Chapter 7 vs. Chapter 13–Gaining Power Over Your Home Mortgage

See these bullet points on dealing with your home lender under Chapter 7 and under Chapter 13.

 

Considering the importance of your home, it’s no surprise that the choice between filing a Chapter 7 “straight bankruptcy” and a Chapter 13 “adjustment of debts” often turns on how each would handle your mortgage. Here is how each would do so.

Chapter 7

  • If you are current on your home mortgage and want to keep your home, you would just continue making the payments after filing bankruptcy. If it has been a struggle to keep current, it should be a lot easier after discharging all or most of your other debts.
  • If you are not current but only a few months behind on your mortgage and want to keep your home, usually you can enter into a “forbearance agreement” with your mortgage lender. It agrees not to foreclose in return for you paying extra each month to catch up within a specified time, usually not more than a year. This works if your bankruptcy improves your cash flow enough so that you can afford to pay both your regular and catch-up payments each month.
  • If you have a judgment lien against your home as a result of a creditor’s lawsuit against you, in many circumstances that lien can be “avoided,” taken off the title. The underlying debt from the judgment would almost always be discharged—legally wiped out.
  • Most other kinds of liens—from taxes, child/spousal support, remodeling contractors, your homeowners association, for instance—are usually not affected by a Chapter 7 case. You will likely need to pay off the debt to get rid of the lien. Talk with your attorney because there are many kinds of liens, each with their own rules.
  • If you are close to a sale on your home but there is a foreclosure sale coming up, a Chapter 7 filing can stop the foreclosure and buy time to close the sale. Coordinate this carefully with your attorney because 1) the Chapter 7 trustee can sometimes complicate the situation, and 2) this buys you only a limited amount of time.
  • If you have decided to surrender your home, Chapter 7 can still stop a foreclosure and buy you more time to be in your home rent-free, more time to save money for your upcoming rent payments and moving costs.
  • If you were to surrender your home without bankruptcy, depending on your state’s laws you could owe a large “deficiency balance” on your first and/or second mortgages—the difference between the amount the home would sell for and the amount of the loan balances. Your Chapter 7 case would discharge any such deficiency balance.

Chapter 13

  • If you are current on your home mortgage and want to keep your home, you would just continue making the payments after filing your Chapter 13 case. (Usually you would continue paying directly to your mortgage lender, but in some jurisdictions you may pay through your Chapter 13 trustee.) If it has been a struggle to keep current on the mortgage, it should be a lot easier because Chapter 13 often radically reduces how much you pay to other creditors.
  • If you are not current, then Chapter 13 gives you much more time to catch up than a Chapter 7 case.  You enter into a court-approved “plan” for getting current on the mortgage, the payments for which are based on your ability to pay. The plan incorporates all your other debts into one package–including other important debts like income taxes, support obligations, and vehicle loans—while protecting you from all your creditors.
  • If you have a second mortgage, and the value of your home is less than the balance on your first mortgage, then Chapter 13 can “strip” that second mortgage off your home. You would no longer have to make that monthly payment, often significantly reducing what your home costs you each month. And your home would become much less “under water,” making keeping the home much more worthwhile in the long run.
  • If you have a judgment lien against your home as a result of a creditor’s lawsuit against you, just as in Chapter 7, often that lien can be “avoided”—taken off the title.
  • Chapter 13 provides a favorable way to take care of most other kinds of liens. With income tax liens, the underlying tax debt can be paid through the Chapter 13 plan, and then the lien released at the completion of the case. Same thing with child/spousal support liens. These kinds of creditors can be very aggressive, but under Chapter 13—unlike Chapter 7—they cannot take any collection action whatsoever while you pay off the underlying debts, as long as you fulfill your obligations under the plan.
  • If you want to sell your home, Chapter 13 gives you some flexibility about when to do so, even if it’s a few years down the line. For example, if you want to stay in your neighborhood until your child finishes at the local school or until you can downsize, or perhaps even until the property value increases, that timing can often be built into your Chapter 13 plan.
  • As with Chapter 7, if you are close to a sale on your home but there is a foreclosure sale coming up, a Chapter 13 filing can stop the foreclosure and buy time to close the sale. Usually it can buy your more time than a Chapter 7 can.
  • You can surrender a home under Chapter 13 as with Chapter 7. Depending on the circumstances, you may be able to delay the surrender longer. After the surrender, you would be able to adjust your Chapter 13 plan to account for the changes in your housing expenses. 

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