Home Sweet Home in Chapter 7 and Chapter 13

Bankruptcy protects your home. Both Chapter 7 and 13 do so, but which is better for you?

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During the holiday season, understandably we feel that much more strongly about preserving our homes for our loved ones. Here are 5 key questions to ask to find out whether a Chapter 7 straight bankruptcy or a Chapter 13 payment plan is what you need.

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1.  Is your home worth more, or have more equity, than allowed by your homestead exemption?

After years of shrinking home values, most people considering bankruptcy don’t need to worry about having too much equity. But states vary widely in their homestead exemption laws, with some protecting precious little home value. And some people fall into financial problems in spite of having a fair amount of equity in their homes—for example, older folks who have spent much of their lifetimes paying off or paying down their mortgage.

If your home is well covered by your applicable homestead exemption, then the Chapter 7 trustee is not going to be interested in taking it from you. But if the home has value beyond the exemption, you should look into Chapter 13 to protect that value.

2.  Are you current on your mortgage and property tax payments, and if not will you be able to get current within a year or so after filing a Chapter 7 bankruptcy?

If you are not behind on your home obligations, you will likely be allowed to continue making those payments to keep the home after you file bankruptcy, regardless whether your other circumstances point you to a Chapter 7 case or a Chapter 13 one.

And if you are not so far behind, so that you could both consistently pay the regular monthly payments and catch up on your mortgage and any property tax arrearage within about a year after filing bankruptcy, you could likely make that a Chapter 7 case and keep your home. However, if you would not be able to catch up within that length of time, you will likely need the extra power of Chapter 13 to buy more time.

3.  Do you have a second (or third) mortgage which is not covered by equity in the home?

IF you have a second mortgage and you owe more on your first mortgage than your home is worth, Chapter 13 allows you to “strip” that second mortgage from your home. This means that you would pay very little or perhaps even nothing on it during your 3-to-5-year case, and then the entire balance would be forever written off. This cannot be done in Chapter 7. So of course if you have a significant second mortgage, this is a huge reason to file under Chapter 13.

This also applies if you have a third mortgage, and you owe more on the combination of your first two mortgages than the home is worth, allowing you to “strip” the third mortgage.

4.  Do you have any current liens against your home which are not going to be resolved by filing Chapter 7?

Some debts result in liens against your home. Some of those liens can be taken care of with a Chapter 7 filing, some cannot.

For example, if in the past you were sued by a credit card company, medical provider, or collection agency, that creditor likely has a judgment lien against your home. As long as your home has no more equity than allowed by your homestead exemption (without even considering that judgment lien), you will likely be able to have that judgment lien released in a Chapter 7 case.

But, to use another example, if instead you have a lien against your home for owing back child support, a Chapter 7 is not going help you with that lien. After you file and finish a Chapter 7 case, your ex-spouse or local/state support enforcement agency may be able to foreclose on your home to enforce that lien. In contrast, a Chapter 13 case would protect you from any such foreclosure threat, while providing you a mechanism for paying off that debt while under this protection.

5.  Do you have any special debts which could threaten your home later after filing a Chapter 7 bankruptcy case?

Even if you do not currently have any known liens or similar threats against your home, you may have future problems if you have one or more special debts which will survive a straight bankruptcy. The prime examples are income taxes, child and spousal support obligations, construction and home repair debts, and homeowner association dues and assessments. In most states, these kinds of debts either are automatic liens against a home or can easily turn into liens. And most liens can eventually be foreclosed to pay the debt underlying the lien. Chapter 13 can either help avoid a lien from attaching to your home or can enable you to pay the underlying debt and get the lien released without it threatening your home. 

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