Bankruptcy frees up cash flow for your mortgage payments. Chapter 7 does so by writing off other debts. Chapter 13 does so more creatively.
Both Chapter 7 and Chapter 13 Improve Your Cash Flow
A Chapter 7 “straight bankruptcy” case would very likely quickly write off (“discharge”) many of your debts. For many people it discharges most of their debts, maybe even all of them except their home mortgage. That frees up cash flow so that you can better afford to pay your mortgage.
A Chapter 13 “adjustment of debts” case is different but has a similar result. It would very likely reduce payments on most or all of your non-mortgage debts. The amount you pay monthly on your debts is often radically reduced. Plus Chapter 13 deals much better with a variety of dangerous debts. The end result is also to free up cash flow so that you can better afford to pay your mortgage.
Let’s take a closer look at these two options.
Chapter 7 Helps You Pay Your Mortgage
Are you current or almost current on your home mortgage, but only because you are not making required payments on some of your other debts? And/or are you not spending what you reasonably should be on expenses such as food, clothing, or doctor/dental visits?
Chapter 7 legally allows you to immediately stop paying most of your debts. This is accomplished through the “automatic stay,” which stops virtually all collection activity against you. (Section 362 of the U.S. Bankruptcy Code.)
Then, under Chapter 7 the bankruptcy court discharges these debts 3 to 4 months after you file your case. (Section 727 of the Bankruptcy Code.)
So if you’ve been struggling to pay your mortgage, Chapter 7 gives you huge relief. You immediately don’t have to pay some or all of other debts that you’ve been paying. So you can better afford to pay your home mortgage.
If you’ve not been paying creditors you should have been, Chapter 7 stops them from coming after you later. This prevents them from suing you and garnishing your wages, taking away your ability to pay your mortgage later. So you get long-term relief.
Also, you can better afford to pay essential home obligations, like your property taxes and homeowner’s insurance. If you are behind on either of these, Chapter 7 helps with this immediately and long-term.
Chapter 13 Helps You Pay Your Mortgage, Helping Both Less and More
A Chapter 13 case may help your cash flow differently than Chapter 7. Usually you do continue paying something to all your creditors (although not always). However, if you have certain special debts, Chapter 13 helps your cash flow much more than Chapter 7.
Chapter 13 also helps more than Chapter 7 if you are behind on or struggling to pay your mortgage, your homeowner’s insurance, or the property taxes.
Let’s look separately at these two ways Chapter 13 help more than Chapter 7.
Chapter 13 Helps Your Cash Flow More if You Have Certain Kinds of Debts
Chapter 7 does not discharge all debts. Back child and spousal support, other divorce-related debts, recent income taxes, and student loans usually are not discharged. If you owe any of those, you will have to continue paying them. In the case of child/spousal support, the filing a Chapter 7 case does not stop its collection at all. (Section 362(b)(2) of the Bankruptcy Code.) With the other debts, collection against you can resume 3-4 months later when the case is completed. (Section 362(c)(2).)
In contrast, filing a Chapter 13 case does stop the collection of these “nondischargeable” debts. As with Chapter 7, the “automatic stay” protection against collection ends when the Chapter 13 case is finished. But with a successful Chapter 13 case that usually doesn’t happen for 3 to 5 years.
More importantly, Chapter 13 provides a great way for you to pay these special kinds of debts in the meantime. You do so based on a reasonable budget, while being protected from all of your creditors. So when your Chapter 13 payment plan is finished, you have paid off or brought current your nondischargeable debts. You no longer need the “automatic stay” protection.
By forcing these special creditors to accept payments based on your budget, you protect your ability to pay your mortgage.
Chapter 13 Helps You Catch up on Your Home Mortgage, Insurance, and Taxes
If you are behind on your mortgage payments, Chapter 13 provides one of the best ways possible to catch up. You have 3 to 5 years to catch up. You do have to continue/resume making your ongoing monthly mortgage payments. The arrearage catch-up payments are incorporated into your single monthly Chapter 13 plan payment. As mentioned above, that plan payment amount is based on your reasonable budget. Other more urgent obligations (such as catching up on child support or maybe a vehicle payment) can sometimes go ahead of catching up on your mortgage for a while. So Chapter 13 can be quite flexible.
If you are behind on homeowner’s insurance, that’s a serious problem. That alone is grounds for foreclosure of your mortgage. The lender will very likely impose its own very expensive “force-placed” insurance, wasting a lot of your money. This often aggravates your already difficult situation. Chapter 13 eases your cash flow so that you can afford to pay your insurance. To the extent force-placed insurance is already in the arrearage amount you owe, Chapter 13 provides a reasonable way to pay it.
If you’re behind on your home’s property taxes, that also is a separate ground for foreclosure. Whether the taxes are part of your mortgage payment or you pay it separately, Chapter 13 can solve this problem. As with homeowner’s insurance, if your lender already paid the taxes, you catch up on that along with the mortgage arrearage. If you pay taxes separately, you catch up with the taxing authority directly, as part of your 3-to-5 year payment plan. Both your mortgage lender and the taxing authority have to cooperate, as long as you fulfill your Chapter 13 obligations.
Chapter 7 helps very directly, by discharging other debt so that you can better afford to pay your mortgage. Chapter 13 helps by providing a better way to deal with especially dangerous debts that Chapter 7 doesn’t handle well.