Filing Chapter 7 bankruptcy gives you important benefits when you’re letting go of your home.
Filing Chapter 13 When You Should Instead Be Surrendering the House
A Chapter 13 “adjustment of debts” gives you a full toolbox of different tools to help people hang onto their homes. It can potentially give a homeowner years to catch up on a mortgage and/or property taxes. Chapter 13 provides very favorable ways to deal with income tax liens and many other debts against a house. It may even “strip” a second mortgage off the title to the home.
But with all that, hanging onto your house may still not be what you need. Even a Chapter 13 case can only do so much. After getting informed about how those tools would work (or not work) in your situation, you may decide that the best thing for you is to walk away from the house. Sometimes that’s the wiser move.
Chapter 7 Benefits
If you do decide that you need to surrender your home to your mortgage lender, Chapter 7 “straight bankruptcy” provides you the follow benefits:
- gives you more control over when your leave the home;
- avoids ongoing liability on house-related debts;
- gives you the leverage and peace of mind of having an attorney looking out for your interests; and
- gives you a full financial fresh start when you really need it.
We’ll expand on these briefly one at a time.
More Control over When You Leave
If you have a foreclosure sale date scheduled, or a foreclosure lawsuit pending, usually you will have no say about when you have to leave. If you’re not paying attention you could even be unexpectedly evicted by the county sheriff.
However, your filing of a Chapter 7 bankruptcy case would delay the foreclosure sale or lawsuit, at least for a few weeks, and more likely for a few months. During that time you would not be paying your mortgage, nor would you need to pay any rent at a new place. That alone could save you a couple thousand dollars in rent.
Also, after a bankruptcy filing, a mortgage lender is often willing to negotiate a departure date convenient to you. This can save them substantial attorney fees, so they tend to be cooperative. You might even get some financial help with moving costs in return for moving earlier.
Avoid House-Related Debt Following You
Depending on your situation, and on your local state laws, after surrendering a house without bankruptcy you risk being saddled with debts coming at you from various creditors related to the home.
Sometimes you could continue being legally liable on the first mortgage after its foreclosure. If you have a second mortgage and are surrendering the house to the first mortgage holder, you would usually continue owing the full balance on the second mortgage. You could also be liable on other debts related to the home—such as unpaid utilities, contractor liens, income tax liens, or homeowner association dues. Many of these debts would be discharged if you filed a bankruptcy.
As to those debts with liens against your house that would NOT be discharged—such as recent income taxes—you would have a practical way to take care of them, instead of just waiting for such creditors to catch up with you. After discharging all or most of your other debts you’d more likely have the means to enter into a payment plan with the IRS or state tax agency.
Have an Attorney in your Corner
Fair or unfair, your mortgage lender will likely treat you better when it knows you are being advised and represented by an attorney (when you have an attorney representing you in your Chapter 7 case). You will have the peace of mind that comes from knowing your rights and having a professional pushing for those rights. You’ll know what will happen when. You’ll have a strong advocate available to get directly involved as needed.
Get a Full Fresh Financial Start (Not the Continuation of a Vicious Cycle)
If you are surrendering your house and reducing your monthly cost of your housing, you may be tempted to think you don’t need a bankruptcy (in spite of the reasons cite above). There’s a chance you don’t.
But that’s not likely. If you have fallen so far behind on your mortgage that a foreclosure is pending, the odds are that you need more help than giving up your house alone will achieve. You most likely have other debt issues that you need help on. The point in time when you’re giving up a house is a very sensible time to deal with your whole financial picture.
At the very least you owe it to yourself to get legal advice about your options, and the advantages and disadvantages of each, including Chapter 7 bankruptcy.