Here’s how Chapter 13 dramatically lets you keep your home, better than anything else available anywhere. Beautiful to see what it can do.
In my last blog post last week, I introduced Amy and her seemingly impossible hope for hanging on to her home. (Please check it out, or you can just keep reading here and refer to it later.) I showed why in her situation filing a Chapter 7 “straight bankruptcy” would “discharge” (legally and permanently write off) tens of thousands of dollars of her debts, but would still not save her home. That’s because she was so far behind on her 1st and 2nd mortgage payments, plus owed back property taxes on her home, plus income taxes that the Chapter 7 case would not discharge. And she only had $150 to spare each month to pay ALL her creditors, after paying her reasonable living expenses and her regular monthly payments on the 1st and 2nd mortgages.
Today I explain how, with so little money to spare, Chapter 13—through a combination of its tools—can save Amy’s home.
Let’s start with a reminder about Amy’s debts:
- credit cards: $20,000
- 1st mortgage arrearage: $6,000
- 2nd mortgage arrearage: $2,500
- property tax arrearage: $2,250
- medical debt judgment lien: $5,000
- 2010 income tax to IRS with tax lien: $2,500
- 2011, 2012, and 2013 income tax to IRS: $6,000
That’s a total of $44,250, besides the $265,000 first mortgage and the $45,000 second mortgage.
A Chapter 7 case would discharge the credit card, medical, and 2010 income tax debts. But it would do nothing for and leave owing the 1st and 2nd mortgage and property tax arrearages totaling $10,750, the judgment and tax liens on the home, and $6,000 in more recent income taxes. How could Amy possibly deal with all that urgent debt with only $150 per month to spare?
Chapter 13 Salvation
Chapter 13 pulls this off in 5 steps (2 explained today, the other 3 next week):
#1—“Stripping” second mortgage from her home: As we said last week, Amy’s home is now valued at about $250,000, less than the $265,000 balance she owes on the 1st mortgage. That means no equity is available for the $45,000 2nd mortgage. As a result that 2nd mortgage can be “stripped” off her title through Chapter 13. (This is NOT available under Chapter 7.) “Stripping” the 2nd mortgage means this debt is changed from one secured by her home into one secured by nothing—in effect acknowledging legally what is true in reality: that the entire value of the home is securing the 1st mortgage, with no value left over for the 2nd mortgage.
Since the 2nd mortgage debt is now unsecured, Amy no longer needs to pay the $250 monthly 2nd mortgage payment, freeing up that much money to pay other creditors through her Chapter 13 payment plan. (She also doesn’t need to pay the 2nd mortgage arrearage.) So now instead of having only $150 per month available to pay the remaining creditors, there’s now $400 each month.
#2—Chapter 13 Plan payment of $400 per month: Under Amy’s plan, she pays this $400 per month to the Chapter 13 trustee for as long as it takes to bring current her 1st mortgage ($6,000) and her property taxes ($2,250), and to pay her 2011—2013 income taxes ($6,000). That’s a total of $14,250.
Interest needs to be paid on the property tax, although Chapter 13 allows paying this debt quite quickly to reduce the total interest to be paid. The Chapter 13 trustee also gets a percentage of the amount being paid through the plan, and Amy’s attorney is also paid for his or her services, whatever amount still owed beyond whatever Amy paid the attorney directly before filing the Chapter 13 case.
To simplify the math, let’s estimate that the total amount that Amy would pay into the plan would be $18,000. At $400 per month, that would amount to 45 months of payments—3 years and 9 months.
I’ll describe the remaining 3 steps in my blog post next week, but in the meantime let me whet your appetite by telling you this: at the end of the 45 months or so of her Chapter 13 case, Amy’s 1st mortgage and property taxes would be completely current, her 2nd mortgage “stripped” off her home, all of her income taxes either discharged or paid in full, her IRS tax lien and the judgment lien will be gone, and all of her remaining unsecured debts (including the 2nd mortgage) forever discharged. Come back next week (or check out the next blog post if it’s up by the time you are reading this) and I’ll explain the rest of how she gets there.