Chapter 13 is known as the home-saver. It provides a set of tools, each of which solves a different problem. It’s a powerful combination.
Here are five of those tools:
1. Catch up on your mortgage arrearage, while protected and with flexibility.
You have the length of your Chapter 13 plan–as long as 5 years—to pay your mortgage back payments. During this entire repayment period, you are protected from foreclosure and most other collection efforts, as long as you follow the terms of the court-approved plan. If you do follow your plan, you will be current on your home when you finish your case.
2. “Strip off” junior mortgages.
Many homeowners in the states hit hardest by the real estate collapse such as Florida, Arizona, Nevada and California have first and second mortgages but their houses are actually worth less than the first mortgage. This is particularly true in the cities of Palm Springs, Cathedral City, Desert Hot Springs, Palm Desert, La Quinta, Rancho Mirage and Indio, California where I practice consumer bankruptcy law.
If your home is worth no more than the amount of your first mortgage, then a second mortgage can be “stripped” of its lien against your home. This means that you would no longer need to make the monthly second mortgage payments, thereby significantly reducing the monthly cost to keep your home. The second mortgage debt is treated in your Chapter 13 case like a “general unsecured creditor,” meaning that the second mortgage balance is paid only as much as you can afford to pay. Whatever portion of that balance that is not paid during your case is written off at the end of it.
3. Prevent income tax liens from being recorded on your home.
Both Chapter 7 and Chapter 13 prevent federal and other income tax liens from attaching to your home while the cases are open. But Chapter 7’s protection lasts only a few months, with a tax lien able to be imposed against your home just as soon as the Chapter 7 case is over, usually only about three months later. This gives the IRS or other taxing authorities much additional leverage against you, and puts your house in jeopardy.
If instead you file a Chapter 13 case before a tax lien is recorded, there won’t ever be such a lien against your home. Instead this tax would be paid off in your Chapter 13 case as a “priority creditor” while the IRS/state could not record a tax lien throughout the process.
4. Satisfy income tax liens, and clear them off your title.
If at the time of your Chapter 13 case, your home already has an unpaid income tax lien against it, the IRS/state will be stopped from acting on that lien. Assuming that lien was imposed for a tax that cannot be written off in bankruptcy, Chapter 13 both provides you a mechanism to pay these inescapable debts on a reasonable timetable and also protects you while you do so.
5. Slash other debt obligations.
Chapter 13 reduces what you must pay on your other debt obligations. As a result, you would be more able to afford your mortgage obligations.
Chapter 13 can surprisingly give you more room in your budget to pay towards your home than if you had filed a Chapter 7 case. That’s because if you owe certain kinds of debts that would not be written off in a Chapter 7 case—such as an ongoing vehicle loan, certain taxes, child or spousal support arrears, and most student loans—Chapter 13 could well allow you to pay less each month on those obligations, leaving more for the home.