I rarely advocate That clients file Chapter 13’s because they take too long and keep them under the thumb of the bankruptcy court for (usually) five years. So when does it make sense?
It makes sense when you want to keep your house but have junior unsecured liens stacked on top of the main mortgage. In Chapter 7, if you want to keep your house, you have to keep the lenders current. Not necessarily so in Chapter 13 when you have stacked loans secured by your home. Since 2006, the Heavy Question [see clever illustration below] has been: Can you dump a mortgage loan in Chapter 13? The short easy answer if you’ve ever read anything at all on my blog is that “it depends.”
First: Is it “secured” solely by your primary residential real estate? And by that I do not mean investment property or personal property. (Pay attention here because the terms and definitions matter.) That is, is the security agreement only applicable to your primary residence? If so, you have passed the first test.
Second: Is it WHOLLY unsecured? By this is meant that there is no security for the loan at all after consideration of all senior debt. Example: House valued at $750,000 With a first deed of trust (“DOT”) for $690,000, a second DOT for $170,000, and third DOT $75,000. Now what?
Well, the first is wholly secured because the value exceeds the loan balance by $60,000 ($750,000 minus $690,000.) Our hypothetical borrower can’t strip this lien because it is wholly secured.
The second is partially secured. It is secured to the extent of the $60,00 left after accounting for the first DOT right? $750,000 minus $690,00 leaves $60,000. Capiche? So because it is partially secured, you can’t strip it and the debtors will have to keep that lender current In order to keep the home.
But the third…Here’s where it gets interesting. After accounting for the first and the second, there is no security value left for the third at all. $690,000 plus $170,000 equals $860,000. But the house is only worth $750,000. Because the third is wholly unsecured, the borrower can “strip” this lien and shove the debt over to the unsecured column…Payable over the time of the Chapter 13 plan.
Why do we care? Because you can’t do this in Chapter 7. It only works in Chapter 13.
This concept as described also only works in parts of the country, so don’t go charging into your bankruptcy lawyer’s office telling him or her all about how you read on the web that you can dump your HELOC. There’s a bit more to it than the above, but this sort of scenario and fact pattern is a good example of when a Chapter 13 might make sense.
Well, you know by now that the answer is: It depends.
If you file Chapter 7, and either are current or get current with your mortgage(s), then you can most likely keep your home. (Assuming you don’t have an equity interest that exceeds the homestead exemption. As to which, see this blog post: California Homestead Exemptions Increased as of January 1, 2010. Other California Bankruptcy Exemptions will increase on April 1, 2010.)
If however, you are in arrears, and are not able to bring the loan current, then–unless you can complete a mortgage modification that allows you to stay–you are likely lose the home.
On the other hand, if you file Chapter 13, and are able to successfully get a payment plan approved by the Court, then you may be able to stay. This is because in a Chapter 13, you can take the outstanding mortgage arrearages, and pay them back through the Chapter 13 plan over the 3 to 5 year commitment.
But don’t try to do this analysis yourself. Talk to a bankruptcy lawyer before you get too excited. There are lots of nit-picky little rules that can torpedo an otherwise possible successful Chapter 13. You need to do the analysis up front.
Most of my clients know that I am not a fan of Chapter 13. This is mostly because I think that it keeps people in the bankruptcy process far too long (3 to 5 years), and that as a result, makes that “fresh start” promised by Congress so elusive. Nonetheless, there are times when it is either advisable or flatly unavoidable.
So here, without fanfare or editorial, is what the federal government would like you to know about Chapter 13. Like my prior post on Chapter 7, it is simply a reprint of the information found on the United States Bankruptcy Court’s website.