A Chapter 13 payment plan is a remarkably good way to catch up on back mortgage payments, but it's also a good way to keep options open on your home if things don't go as planned.
Chapter 13's Unique Powers
For a long list of reasons, Chapter 13 is an excellent way to save your home:
- It reduces and sometimes even eliminates most or all of your other debts, enabling you to focus on paying your home obligations.
- Sometimes it can both reduce how much you pay on your home each month and give you years to catch up on those home obligations that must be paid, including back payments on your mortgage itself. It reduces how much you need to pay monthly and in the long run by "stripping" a second mortgage: eliminating or vastly reducing what you have to pay on that second mortgage.
- Chapter 13 can get rid of judgment liens (the same way as Chapter 7 can).
- Unlike Chapter 7, it can keep protecting you from special, otherwise very powerful 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 during your case.
Chapter 13's Limits
But there are definitely limits to what you can do through Chapter 13. For example you cannot reduce your FIRST mortgage monthly payment, nor its balance. That's true even if your home is "underwater"-worth less than the first mortgage. And if you are not current on your mortgage payments, you must catch up during your Chapter 13 case, while also having enough disposable income to keep current on your regular monthly payments, plus on your property taxes and insurance.
So, Chapter 13 is a great tool for keep your home, but it has its limits. If you did succeed in paying what is required throughout your Chapter 13 plan, you would finish it being current on your home and otherwise likely free of all debts. But what happens in Chapter 13 to your home if you can't make your plan payments and/or your regular mortgage payments perfectly because of unexpected circumstances?
Chapter 13's Flexibility
Our recent blog asked " Can I Modify or Change My Chapter 13 Bankruptcy ?" Please read that if you haven't already for appropriate background information. Today's blog addresses that question but focusing on your home. We look at two angles: 1) changes in your circumstances leaving you still wanting to and able to keep your house; 2) changes leaving you wanting or needing to let go of your house.
Still Keeping Your Home
If in the midst of your Chapter 13 case your income is reduced or expenses are significantly increased so you can't pay your full plan payment, your attorney may be able to change the terms of your plan enough to solve your problem. It's impossible to generalize, because Chapter 13 plans can be very different, with varying degrees of flexibility within them.
But to get a feel how this works in practice, here's an example of some changed circumstances which did allow the keeping of a home. Consider a situation in which a husband and wife both work, together making a decent income. But then husband loses his job, is unemployed for months, and finds a new job at a lower income. So they file a Chapter 13 case because they'd fallen behind on their mortgage during his unemployment. Their 3-year Chapter 13 plan was designed to catch up their mortgage and pay 50% of their other debts. But now two years into their case, the wife's income also gets significantly reduced so that they can no longer afford their plan payment. But they want to continue staying in their home so that their school-aged children can stay in their local schools. In this scenario there's a good chance that their plan payment could be significantly reduced by stretching out the plan an additional two years (totaling at most five yers) and likely reducing or possibly even eliminating the percentage being paid to their other creditors.
Letting Go of Your Home
Sometimes people file a Chapter 13 case with the specific intent to stay in their home for a limited time. If their house is under foreclosure, they may only want or need to stay a few months more than would be possible under Chapter 7. Or they may intend to sell or let go of the house a few years later, such as when a child finishes high school or when the folks are ready to retire. Or, sometimes people do want to try to keep their home permanently, but recognize that their future income is not necessarily reliable.
In these situations it's good to know that Chapter 13 can buy you time in your home-either a few months or often a few years-and then let you sell or surrender it in advantageous ways.
For example, in the unusual situation that you have no debts other than your home, or none that you couldn't handle, at any time during your Chapter 13 case you can dismiss (close) it, and then sell or surrender your home.
In the much more likely scenario that you do have other debts, you could "convert" your Chapter 13 case into a Chapter 7 one, with the timing of the sale or surrender of the home depending on the circumstances of the case. This gives you the benefit of discharging (writing off) all or most of your other debts.
Finally, if you qualify for a "hardship discharge" (see our earlier blog referred to above for more about this option), that could be done in conjunction with a sale or surrender of the house as well, also usually leaving you with a fresh start.
The bottom line is that Chapter 13 can be a great way to hang onto your home permanently, but it also comes with a fair amount of flexibility if you end up keeping it only temporarily, either intentionally or because your circumstances change.