The Power of Chapter 13 to Save Your Home (and its Limitations)—Part 3

January 25, 2010 by Oliveros & O'Brien, P.C.

In our blog two weeks ago we talked about some of the most basic and important home-saving tools in Chapter 13:  1) the “automatic stay,” 2) curing mortgage arrearages, and 3) catching up on property taxes. In last week’s blog we talked about some of the more sophisticated tools that Chapter 13 may be able to provide for your home: 1) junior mortgage “strip-off,” 2) judgment lien “avoidance,” and 3) cure and release of income tax liens. This week we wrap up this series with a set of tactics that pull all this together. You might want to read the other two blogs before this one.

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1.  Favor home payments over other creditors: Save what’s most important.

One of the best things about Chapter 13 procedure is it allows you to concentrate your financial resources on saving your house. And unlike Chapter 7, it allows you to do that in an organized, less stressful way. Here’s how:

  • Your Chapter 13 budget is built around you being able to make your regular house payment(s). You must make your regular house payments the first monthly due date after your Chapter 13 case is filed, but (assuming you have the income to support it) your budget will include money for you to make these payments.
  • In many Chapter 13 plans, you will be allowed to pay all your home-related payments—the mortgage arrearage, property tax arrearage, and any income tax liens on the home—before “general unsecured” creditors have to be paid anything. That means that your home often legally comes before credit card debts, medical debts, and certain categories of income taxes. Getting to pay on your house instead of the IRS (in some cases) is a good deal!
  • Even in cases where you must pay “general unsecured” part of what you owe them, your home-related payments are generally brought current first.
  • When you have income taxes that are not going to be “discharged” (written off) in bankruptcy (on account of them being relatively recent), Chapter 13 prevents new income tax liens for those existing taxes from hitting your home in the months and years after filing. In Chapter 7, nothing would stop the IRS and the Oregon Department of Revenue from recording tax liens on your home to ensure payment of the tax.
  • If your home needs critical repairs or upkeep, in some circumstances you are even permitted to put money into this, before or instead of paying some creditors. At the very least, you are allowed to budget for a modest amount of monthly home maintenance.

2.  Reduce your home obligations: Improve your chances to keep your home by making it less expensive to do so.

In spite of a number of attempts in the last couple years, Congress keeps not passing the Chapter 13 mortgage cram down bill. So bankruptcy judges do not have the power to reduce your first mortgage payment. But in some cases, in a Chapter 13 (and NOT in Chapter 7) you can “strip-off” a second or third mortgage, so that you would not need to pay that mortgage. And in some situations you can “avoid” a judgment lien on your house, so that you may not need to pay that at all or only in part. These can reduce your monthly obligation significantly.

And as for liens on your home that you DO have to pay—like mortgage arrearage, back property taxes, home repair “mechanics liens,” water service and other city liens, or income tax liens—they can be stretched out over years instead of having to be paid right away to avoid foreclosure. Chapter 13 turns these “impossible” situations into a manageable program for dealing with these obligations.

3.  Get some breathing space to sell your home: Market it with time on your side.

These are obviously turbulent times in the housing market all over the country and all over Oregon. Homeowners trying to sell their homes are usually competing with a flood of foreclosed properties that the mortgage companies are willing to sell for a loss. Potential buyers are afraid to buy only to have property values decline even further. The market has been showing some signs of stabilizing in the last several months, but the values continue to be hard to pin down and houses are still often sitting on the market for a long time.

Chapter 13 can buy you critical time to sell your home. Chapter 7 can usually buy you only a couple months or so. Depending on the circumstances, Chapter 13 can usually get you more time. The circumstances include especially the value of the real estate versus the debts against it, and your ability to maintain payments on it until it sells. Some homeowners do sell their homes as late as three to four years after their Chapter 13 cases are filed.

Finally, Chapter 13 may well help make your home more marketable by enabling you first to get rid of certain select liens on the property. This could even, in just the right circumstances, turn a situation where you had no equity in the home into one where you may be able to get a modest amount of proceeds from the sale.

 

To determine the best course of action for you and your home among all these tools that Chapter 13 provides, you need an attorney who is intimately familiar with them and how they all interrelate. At Oliveros & O’Brien we are at the leading edge of bankruptcy law and practice. Michael O'Brien has been representing clients exclusively in the bankruptcy and related fields his entire career of nearly fifteen years. He is a frequent speaker at seminars for other attorneys on bankruptcy issues. You can set up a free consultation meeting with Mike or one of our other attorneys by calling us at 503-786-3800 or by clicking on the “Contact Us” tab above.  We look forward to helping you.