Including Your House Debts in Bankruptcy
Both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” can help you keep your house. Be sure you talk to an attorney to understand how they can do so. Believe it or not, under some circumstances you can significantly reduce your monthly payments, and even reduce the debt against your house by tens or even hundreds of thousands of dollars. So you may be able to keep your home when you thought you couldn’t afford to.
But assuming that you have been well informed about your options and have decided to surrender your home, Chapter 7 can give you many advantages while you do so.
Timing Advantages of Surrendering Your Home in a Chapter 7 Case
A Chapter 7 case can give you a precious few extra weeks or months in your home, usually while you are not paying your mortgage(s). This gives you time to gather more money for your transition to other housing. Or it can give you the necessary time to complete a pending sale that was threatened by a foreclosure. Or in some cases, it even buys you the leverage for “cash for keys”—the lender paying you money to move out on a mutually agreed date.
The filing of a Chapter 7 case imposes the “automatic stay,” the immediate stopping of virtually all creditors’ actions against you, including a foreclosure of your home. So if you have a foreclosure sale pending, with the right timing that foreclosure would be stopped and delayed. That “automatic stay” lasts the length of your case, usually 3 to 4 months. But the delay may be shorter than that if the creditor asks the bankruptcy court for “relief from stay”—permission to re-start the foreclosure. At that point it might be possible to negotiate the above “cash for keys” option or some other arrangement that would be advantageous to you.
Debt Advantages
Depending on what debts you have against your house, a Chapter 7 case may well be able to discharge (legally write off) obligations that you would be saddled with if you surrendered the house without filing bankruptcy.
For example, if you have a second mortgage, a foreclosure by the first mortgage lender would usually leave the second mortgage debt unpaid and potentially still owed by you. The same thing would likely happen if you simply surrendered the house. This could leave you owing tens of thousands of dollars, which your Chapter 7 case would almost certainly discharge (legally write off).
There are various other debts potentially secured by the home—such as judgment liens, income tax liens, homeowners’ association dues and assessments—which would also likely be left owing after a foreclosure by your mortgage holder. Also, some of those creditors, who may have been content to take no action as long as they believed they would eventually be paid through a sale of the house, would likely be spurred into going after you personally once they were foreclosed off the title to the real estate. Dealing with all of this through a Chapter 7 case, getting it all taken care of at once instead of letting it drag on for years, often is the most sensible solution.
Home Sale Advantages
If you are trying to close a sale, including a short sale (when you owe more on the home than it is worth), a Chapter 7 filing may well help. Besides potentially giving you more time if your sale is threatened by a foreclosure, it can give you two other important advantages.
First, if you have a judgment against you which has turned into a judgment lien attached to the house, a Chapter 7 “judgment lien avoidance” may well get rid of that lien so that it does not need to be paid. That may enable the sale to proceed when there was not enough money to pay the secured creditors beforehand, or could even leave you with money from the sale proceeds that would have otherwise gone to that judgment creditor.
Second, the pending bankruptcy’s anticipated discharge of a second mortgage may provide leverage on that creditor to stop holding up a short sale, or convince it to accept less than it would have otherwise.
Income Tax Advantage
When a creditor reduces or eliminates the debt you owe to it—such as debt owed to your second mortgage lender through a short sale—the amount that you no longer owe can under some circumstances be considered income for income tax purposes. This is called “cancellation of debt income.” Details of this are beyond the scope of this blog and should be discussed with your tax professional. But generally, if this occurs while in a bankruptcy case, such cancellation of debt is not treated as income.
If you live in the Dallas-Fort Worth Metroplex, call me to determine if Chapter 7 is right for you regarding your mortgage(s), other home related debts, and all your other debts. I am Carrie Weir, a Texas bankruptcy attorney serving the Metroplex, especially the area around Rockwall, Heath, Greenville, Lavon, Wylie, Mesquite, and Rowlett. Please contact me for a free and confidential consultation, so that you can make an informed choice about your home and the rest of your finances. Call 972-772-3083 or use the contact form here. I look forward to helping you. Thank you.
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