If you’re worried about protecting your house, unlike Chapter 7, Chapter 13 offers ways to keep it. But you’ll have to demonstrate that you have enough income to:
Another benefit of Chapter 13 that isn’t available in Chapter 7 is this: If your house is worth less than the amount you owe on your first mortgage, you might be able to use Chapter 13 to remove the junior mortgages.
Get tips that will help you choose between Chapter 7 and Chapter 13.
You don’t lose property in Chapter 13—that is as long as you can afford to keep it. Each state decides the type of property filers can protect, including the amount of home equity. These figures appear in the state’s bankruptcy exemptions. If you can’t protect all of the equity with an exemption, you’ll have to pay your creditors an amount equal to the value of any nonexempt property equity through your repayment plan (and possibly more). You’ll learn how much home equity you can protect by researching your state’s homestead exemption.
Find out more about how home equity can affect Chapter 13.
If you want to keep your home, you must stay current on your mortgage during your Chapter 13 case. In many Chapter 13 bankruptcies, you will pay your mortgage lender directly. In some, however, the court and Chapter 13 trustee appointed to oversee your case will require you to make your mortgage payments through your Chapter 13 plan—especially if you owe arrearages when you file. The trustee will pay your lender each month.
Keep in mind that the trustee receives a percentage of all of the funds paid through your plan—and you’ll pay the trustee that amount. If given the option, it's almost always better to pay your lender outside of your Chapter 13 plan. The higher your plan payment and the more the trustee receives to pay creditors, the more you’ll pay in fees.
You'll have to pay back all of your mortgage arrears by the end of the repayment period, too. But you don’t have to pay it all at once. You’ll have three to five years to make up the overdue payments. This feature of Chapter 13 is one reason why many people facing foreclosure opt for Chapter 13 over Chapter 7 bankruptcy.
If you are in foreclosure when you file for Chapter 13, bankruptcy's automatic stay—the order that stops most creditors in their tracks—puts a hold on the foreclosure. If you stay current on your mortgage payments and make up the arrears through your Chapter 13 plan—and you can afford to pay for any nonexempt equity—the lender cannot foreclose. You’ll be able to keep your home.
One of the most significant benefits of Chapter 13 is that in some instances, you can pay significantly less for your home than what you owe. If you have junior mortgages or a home equity line of credit (HELOC) that are no longer secured by the equity in your home, you can strip these loans off through Chapter 13 bankruptcy.
Before removing or stripping down a junior mortgage or HELOC, the value of your home must have declined enough so that your home equity is insufficient to cover any portion of the loan or HELOC. You can demonstrate this by getting a professional home appraisal before you file bankruptcy. The appraisal must show that the fair market value of your house is so low that if, after selling the house and paying the first mortgage, nothing would remain to pay the second or lesser mortgage holder.
To get an idea about whether you could strip a loan, start with the value of your home. If it’s less than the first mortgage—the first debt secured by the house—then any subsequent or junior mortgage will be wholly unsecured. Nothing would be left to pay the junior lenders after a home sale. If, however, even a dollar remains to pay the junior mortgage, the loan isn’t wholly unsecured, and it wouldn’t qualify for removal.
Example. Your balance on your first mortgage is $500,000. You have a $50,000 second mortgage. Your home is currently worth $475,000. In this scenario, the equity doesn’t secure your second mortgage. Why? Because the equity won’t cover the first mortgage in its entirety—only $475,000 of it—leaving the second mortgage wholly unsecured. You can strip it off.
You cannot strip off a second mortgage that is partially secured by your equity in the home. If the value of your house is enough to pay even part of your second mortgage out of a sale, it is partially secured, and the court won’t remove the second mortgage through bankruptcy.
Example. Your balance on your first mortgage is $500,000. You have a $50,000 second, and the current market value of your home is $525,000. In this scenario, $25,000 secures your second mortgage. Here’s the math: Your home value of $525,000 minus the balance of your first $500,00 mortgage leaves you with $25,000 in equity partially securing your second mortgage. You won’t be able to strip off the second mortgage.
Not all courts agree on the proper method for stripping a lien from your home. Most courts prefer debtors to address the lien stripping and their Chapter 13 plan or to bring a motion asking the court to strip the lien. A few courts require debtors to bring an adversary proceeding to strip off a lien. If you file a motion or raise the issue in your plan, and the lender objects, the court will schedule a hearing where you and the creditor can present evidence.
If there is only a small difference between the market value of your home and your first mortgage, you might need to have a second appraisal. Or you could present additional evidence to prove the current market value of your house and that the second mortgage is wholly unsecured. The burden of proof is on you.
If the judge rules in your favor, the court will remove the lien secured by the second mortgage from your home, and the loan amount will become part of your unsecured debt, and paid along with your other unsecured debt according to your Chapter 13 plan. At the end of the repayment period, the court will discharge any remaining loan amounts on the stripped off mortgages.
Before the court confirms (allow) your Chapter 13 repayment plan to go forward, you’ll have to demonstrate that you have sufficient income to meet other required payments. For instance, you’ll have to pay priority debts in full throughout your repayment plan, such as support obligations and new tax debt.
Find out more about the other debt you must pay in Chapter 13.