How to Handle Special Creditors Who Can Defeat Your Homestead Exemption

March 8, 2010 by Oliveros & O'Brien, P.C.

The protection you get from most creditors through the homestead exemption does not apply to some categories of creditors. We listed the most important of these categories in recent blog called The Homestead Exemption in Action. We said there that even though these special creditors can defeat the homestead exemption, they can still often be handled in a favorable way through certain bankruptcy procedures. That’s what we talk about here. Plus how sometimes owing money to these special creditors can even be turned to your advantage.

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In a nutshell, your home is protected from most creditors as long as the amount of its equity is less than the homestead exemption amount. In Oregon, that exemption amount is $40,000 for a single homeowner and $50,000 for a married couple. So if you have less equity than these amounts, a regular creditor—such as a credit card or a collector on a medical bill—CANNOT foreclose on your house to get its debt paid. See our earlier blog called Homestead Exemption Basics for more about how this works.

But some kinds of creditors are not affected by the homestead exemption. These creditors CAN, in many circumstances, force the sale of your house to get their debts paid. The most common kinds of creditors from which the homestead exemption does NOT protect your home are:

  • Mortgages and trust deeds, including home equity lines of credit and just about any loan for which you put up your house as collateral.
  • Real property taxes on that real estate.
  • Homeowner or condominium association dues and charges, in any, on your home.
  • Income tax liens, once they are recorded on your property.
  • Construction liens for services and materiel to make repairs or improvements on your home.
  • Child support obligations which are included in a divorce or similar decree.

Why are these kinds of creditors different? Because the law says they deserve special treatment. In each case there is some reason why these creditors’ rights are considered more important than your right to protect your home from them. For example, the state’s legislature has decided that it’s usually more important to get a back child support debt paid than it is to let the person who is behind on the support to protect the equity in his or her house from that debt.

 

Protecting Your Home from These Special Creditors

Even without the protection of the homestead exemption, filing a bankruptcy can help you protect your home from even these creditors in two broad ways.

Chapter 7 (“Straight” Bankruptcy)

Filing a Chapter 7 case can help you deal with these special creditors, even though their debts usually cannot be written off, or “discharged.” They can’t be discharged because these kinds of creditors tend to be secured by your home, so you must pay them if you want to keep the home. Also, often bankruptcy law specifically excludes these debts from discharge.

In spite of this, in the right situation filing a Chapter 7 can still solve your problem. Particularly if you do not owe very much to one of these special creditors, or are not very far behind on payments, filing a Chapter 7 case can let you stop paying your other creditors so that you can focus on paying this one.

For example, let’s say you may have fallen a payment or two behind on your mortgage or your child support. You were trying to keep all your creditors paid but just couldn’t. Now when we file a Chapter 7 case for you, that lets you stop paying most of your other debts, which then frees up your cash flow so you have a chance to catch up on the mortgage or support.

A Chapter 7 case protects you from the collection actions of almost all your creditors, but it does so only for about three months. Sometimes less. So you would likely need to catch up with these kinds of special creditors within that short time. In some cases we can negotiate payment terms that give you some more time. For example, home mortgage holders generally give you between 6 and 12 months to catch up on back payments, requiring you to agree to a firm (and often pretty tough) repayment schedule.

Chapter 13 (Payment Plan)

But the relatively little time that Chapter 7 gives you is not enough.  Chapter 13 gives you much more help. It gives you years instead of months to catch up or pay off one of those creditors.

For example, if you are 5 payments behind on your $1,200 monthly mortgage payments, instead of having to somehow come up with that $6,000 in arrears in a few months, Chapter 13 allows you to spread that out over 3-to-5 years. Same thing if you fell behind on your spousal support or property taxes, or owed a few thousand on a home repair that you could not pay earlier: you would have a 3-to-5 year period to catch up or pay off the debt.

And once your Chapter 13 plan was approved by the court, throughout the entire length of your case the creditors would not be able to foreclose on your house or collect on the debt in any other way. At the end of your case you would have either cured your arrearage or paid off the debt.

Turning these Special Debts to Your Advantage

A smart and diligent attorney can even use that you have a debt to one (or more) of these special creditors to your advantage. Notice the law gives each of these special creditors a lien on your home. It’s that lien that gives these special creditors priority ahead of your homestead exemption. Well, that lien also puts them ahead of most of your other creditors, creating some great opportunities for you.

Opportunities in Chapter 7

You may be able to get rid of a judgment lien against your home that you would not have been able to if did not owe one or more of these special creditors. Please see the section on “Judgment Lien Avoidance“ in our earlier blog, The Power of Chapter 13 to Save Your Home. We can take advantage of the fact that these special creditors reduce the amount of equity available to your judgment creditor, sometimes just enough to be able to get rid of the judgment lien. Since you often want to or have to pay these special creditors anyway, it’s a great bonus to use the debt you owe to them to help get out from under another creditor’s judgment.

Opportunities in Chapter 13

Chapter 13 also allows us to get rid of judgment liens, and just like in Chapter 7 as just described, it lets us take advantage of your lower home equity resulting from the special creditor’s higher-priority lien.

But Chapter 13 sometimes even lets us get rid of a second or third mortgage. This power is very unusual in the law. It cannot be done in a Chapter 7. It can only happen with just the right numbers—the value of your home, the balance(s) on your special debt(s), and the amounts owed on each of your mortgages. But in this unusual twist in the law, having even a relatively small property tax arrearage or homeowners association lien, or some of these other special high-priority debts, could enable us to take tens of thousands of dollars of a mortgage off the title of your home.

Conclusion

As you can see, the law in this area is complicated, while the potential benefits to you are huge. Let us help you use every advantage that the law can give you. To schedule a free consultation with us, please call 503-786-3800 or click on “Contact Us” above. We look forward to using our expertise to find the best solution for you.