Read on for details about the homestead exemption, one of the most popular bankruptcy exemptions.
The homestead exemption protects or “exempts” equity in the home in which you reside. Almost every state has a homestead exemption you can use to protect your home’s equity from creditors in and outside of bankruptcy.
You use a homestead exemption the same way you use other bankruptcy exemptions. Bankruptcy exemptions protect some of your property from creditors. You'll list your property and the exemption protecting it in your bankruptcy petition.
Bankruptcy exemption amounts vary by state, so the amount of home equity you can protect will depend on where you live. Also, your state might allow you to use the federal exemption system. If you're given a choice, select your list carefully. You're limited to the exemptions in the list you choose.
Below you'll find links to state-specific homestead exemption articles. If your state doesn't appear in the first list, you'll find your state's homestead exemption statute and a link to the state's online statutes in the next chart
Exemptions change periodically. These 2021 figures are not being updated. You can meet with a bankruptcy attorney to learn current amounts and how exemptions apply to your situation.
Alaska $72,900 or fed. exemption§§ 09.38.010; 8 AAC 95.030(a) |
Kentucky $5,000 or fed. exemption |
Vermont $125,000 or fed. exemptiontit. § 27-101 |
Delaware $125,000 |
Louisiana $35,000§ 20.1 |
West Virginia $35,000§ 38-10-4 |
D.C. Unlimited or fed. exemption§ 15-501(1)(14) |
Mississippi $75,000§§ 85-3-1, 85-3-21 |
Most exemption statutes have requirements included in the law and, possibly, the current exemption amount. However, many states don’t post exemption increases when the amount changes.
If the homestead exemption in the statute is less than we’ve posted, don’t rely on it. A local bankruptcy attorney can give you the current homestead amount and evaluate whether you qualify to keep your home in bankruptcy.
To find other exemptions in your state and determine whether you can use the federal bankruptcy exemptions, go to Bankruptcy Exemptions by State.
A Chapter 7 trustee will sell your home and distribute the proceeds to creditors if you can't protect all the home's equity. In Chapter 13, you can pay creditors an amount equal to your nonexempt equity through the three- to five-year Chapter 13 repayment plan and keep the home.
Learn about the other requirements you'll need to meet to keep your house in bankruptcy.
All exemptions have exclusions or “fine print” that restrict use. We explain some of the rules you should be aware of below. Your local bankruptcy lawyer can explain how they might apply in your case. Also, the bankruptcy chapter you file will determine what will happen to your home if you can’t protect all of the equity. You'll find more information about these issues below.
Although it's possible to strike up an agreement with your mortgage lender to bring your overdue mortgage current in Chapter 7, the lender doesn’t have to work with you, and many won’t. To ensure you don’t lose your house in Chapter 7, you’ll want to be current on your mortgage, be able to protect all equity with a homestead exemption and continue making your payment after bankruptcy.
Homestead exemptions aren't always sufficient to protect all of a homeowner's equity. Check whether your state offers a "wildcard exemption" which will allow you to exempt any property of your choosing. The federal exemptions offer a wildcard exemption.
In many instances, you can stack the wildcard exemption on top of your homestead exemption, increasing the total protectable amount. However, some states limit a wildcard's use by precluding real estate or cash.
Federal law restricts homestead exemptions to prevent people from shielding their assets by moving to states with unlimited homestead exemptions shortly before filing for bankruptcy. You must have purchased your home at least 40 months before bankruptcy before you'll qualify for the state's homestead exemption.
However, an exception exists. If you sold your home and bought a new one with the sale proceeds in the new state, the time you owned your first home will count toward the 40-month requirement.
Suppose you can't satisfy the homestead domicile requirement. In that case, federal law caps your homestead exemption at $189,050 regardless of your state exemption amount (for cases filed between April 1, 2022, and March 31, 2025). (28 U.S.C. 522(p),(q).)
Your homestead exemption is also capped at $189,050 if you have committed bankruptcy fraud or other crimes (for cases filed between April 1, 2022, and March 31, 2025). (28 U.S.C. 522(p),(q).) Learn more about bankruptcy fraud and the consequences of bankruptcy fraud.
Did you know Nolo has made the law easy for over fifty years? It’s true—and we want to ensure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
|
More Like This |
How to File for Bankruptcy in Your State |
Other Articles You Might Like |
|
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>In this article, you'll find answers to common Chapter 13 mortgage questions, including:
We also provide an overview of the Chapter 13 process and its impact on your home in Chapter 13 bankruptcy.
Table of Contents:
Actually, no, you don’t. If you can’t afford the payment or don’t want the home anymore, you can give the home back to the lender. Surrendering it will relieve you of your responsibility to make the monthly payment.
If you let the home go, the mortgage debt will get lumped with other low-priority obligations that must share your “disposable income,” the amount remaining after you pay monthly expenses and other required debts. These creditors often receive pennies on the dollar.
When you complete the Chapter 13 plan, the balance will be “discharged” or erased with other qualifying balances. However, if you want to keep your home in Chapter 13, you’ll have to pay what you owe.
You’ll need to do three things to keep your financed house in Chapter 13:
Anytime you stop paying mortgage payments, the lender can foreclose on the home.
Many people wonder why they can “discharge” or wipe out most credit card debts in bankruptcy without losing the things they charged, yet they’d lose their house or car if they didn’t continue making payments. The answer is “collateral.”
Lenders don’t like to lose money. So when you take out a loan for an expensive purchase, you must agree that the home, car, or other item will serve as collateral to guarantee the loan.
The lender gets an ownership interest or “lien” that remains on the property, creating a “secured debt” until you pay for it. A mortgage lien allows the lender to sell your house at a foreclosure sale if you stop paying your mortgage.
Filing for bankruptcy doesn’t remove mortgage liens. In most cases, if you don’t pay, you’ll lose the home. We explain a minor exception known as lien stripping below that rarely applies when home values are rising.
A home lender will foreclose if your house payment is past due and your Chapter 13 plan doesn’t provide for the arrearages. You can also expect foreclosure if you stop paying your house payment during bankruptcy, fail to carry homeowner’s insurance, or breach another mortgage provision.
But the lender must first get permission from the court. We explain the process below in the “How a Lender Lifts the Automatic Stay to Foreclose in Chapter 13” section.
You can’t miss any. A Chapter 13 plan is a contractual agreement to pay creditors a particular amount during a specific time and often includes time-sensitive interest payments.
You’ll start making your proposed Chapter 13 payment about 30 days after filing and before the bankruptcy court “confirms” or approves your plan. When necessary, payment amounts are adjusted after confirmation to allow you to complete the plan within three or five years.
If you were to miss payments, you wouldn’t be able to complete your plan on schedule or as approved. So if you stop paying without making arrangements with the Chapter 13 trustee—the official appointed to oversee your case—the trustee will ask the court to dismiss your bankruptcy matter.
As long as you caught up the next month, missing one payment probably wouldn’t derail your Chapter 13 plan. However, you’d need to pay any late fees and penalties not included in your plan payment. Otherwise, you could have a significant problem on your hands.
Here’s why.
Suppose you pay your house payment through your Chapter 13 plan, You miss a plan payment because of unexpected expenses, but the trustee agrees you can catch up the following month.
The trustee doesn’t cover your payment for you, so your house payment will go unpaid for a month. The lender will assess late fees and penalties, which can be hefty.
If you don’t pay the trustee enough extra to cover late fees the following month, your account will show an outstanding balance, and your lender will assess new late fees each month, even though the trustee continues to send the monthly payment.
If you continue falling further behind each month, you could owe a sizeable payment to your lender at the end of the plan period, which, if large enough, could put you in a position of foreclosure again.
Most lawyers add an extra amount to the plan payment to cover these types of problems, but it isn’t always enough. The best practice is to avoid missing payments when at all possible.
Learn about other options available when you can't make your Chapter 13 plan payment.
If you owe more than what your home is worth and you have multiple mortgages on the property, Chapter 13 offers a solution. You can remove or strip off a junior mortgage in Chapter 13 if the junior mortgage is “wholly unsecured.”
Example. Suppose you have a $250,000 first mortgage, a $100,000 second mortgage, and a $75,000 third mortgage on a home worth $300,000. You could use the sales proceeds to pay the first mortgage if you sold the house. You’d also have $50,000 to pay toward the second mortgage. But nothing would be left for the third mortgage, leaving the third mortgage wholly unsecured. You could discharge the third mortgage in Chapter 13.
Stripping liens in Chapter 13 isn’t automatic or straightforward. A local bankruptcy lawyer can explain the process, including how to prove your home’s value.
Once you file a Chapter 13 bankruptcy case, the court puts an order called the automatic stay in place. The stay prohibits creditors from engaging in most collection activities.
The bankruptcy stay can help with foreclosure by preventing your lender from foreclosing on your house without obtaining court permission.
A lender who wants to move forward with foreclosure starts the process by filing a motion for relief from the automatic stay with the court. If the lender wins the motion, it will be able to begin—or resume—the process of obtaining the home, selling it at auction, and applying the proceeds to the mortgage loan.
After the lender files the motion for relief, you’ll have an opportunity to respond. If you don’t “oppose” or fight the motion, the court will usually grant the request and lift the stay for the mortgage lender only. It will remain in effect for your other creditors, but your lender will be free to initiate or continue foreclosure proceedings.
If you oppose the lender’s motion for relief, the judge will set a hearing and listen to each side’s argument before granting or denying the lender’s motion.
If you convince the judge that you can catch up on the missed payments, the judge will usually give you time to make the payments. However, the court will likely lift the stay without further hearing if you fail to.
Learn more about what happens when a creditor tries to “lift” or remove the automatic stay.
It’s likely, yes. But most lenders have a waiting period that must pass first, although some shorten it significantly if you can show that the bankruptcy filing was due to circumstances beyond your control.
You’ll also need to satisfy income and credit score requirements. Learn more about buying a house after Chapter 13 bankruptcy.
Did you know Nolo has been making the law easy for over fifty years? It’s true—and we want to make sure you find what you need. Below you’ll find more articles explaining how bankruptcy works. And don’t forget that our bankruptcy homepage is the best place to start if you have other questions!
Our Editor's Picks for You |
|
More Like This |
Which Bankruptcy Chapter Should I File If I Want to Keep My House? |
Consider Before Filing Bankruptcy |
How to File for Chapter 13 Bankruptcy |
Helpful Bankruptcy Sites |
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.
]]>(To learn more about what happens to your mortgage in Chapter 13 bankruptcy, including ways to avoid foreclosure, see Your Home and Mortgage in Chapter 13 Bankruptcy.)
When you buy a house, you put up the home as collateral to secure the loan. If you don’t pay the mortgage as agreed, the lender can foreclose on the home, sell it at auction, and apply the funds to your mortgage debt.
Putting up collateral gives the lender an ownership right in your property until you repay the debt. The ownership right is called a lien. In most cases, even if you wipe out your responsibility to pay the debt in bankruptcy, the lien creates a “secured debt” and will remain. The lien allows the lender to take back the property.
For example, most credit card debts are unsecured debts. You didn’t agree to give the lender an ownership interest in the school supplies you bought for your kids on credit. If you wipe out that debt in bankruptcy, you’ll get to keep the school supplies.
By contrast, most car lenders and home lenders get a lien on the property, making the debt a secured debt. In cases of secured debt, you have to give the property back, even if you wipe out the debt in bankruptcy.
Be careful, though. A few credit cards tend to be secured. For instance, most furniture, appliance, jewelry, and electronics credit accounts require you to secure the debt with the purchased property.
(Learn more in Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.)
Lien stripping allows you to get rid of the “wholly unsecured” liens on your property. When a mortgage or lien is put on your house, its priority is usually determined by when the lien was recorded with your county (known as the “first in time” rule).
For the most part, the earlier recorded lien has priority over any subsequent liens. So if your house gets foreclosed on, your first mortgage lender will be paid first from the sale proceeds before the lender on your second mortgage sees any money.
In many cases, if you owed more on your first mortgage than the fair market value of your house, your second mortgage lender would not receive anything from the foreclosure because there would be nothing left over after paying the first. If the lender won't get any money at a sale, your second mortgage is considered “wholly unsecured” and can be stripped through a Chapter 13 bankruptcy.
Example. Say you own a house worth $300,000, and you have a $400,000 first mortgage. In this situation, you can strip any liens that are junior to your first mortgage. So if you had a second mortgage with a balance of $100,000, you could get rid of it through lien stripping in a Chapter 13 bankruptcy.
(For more details about lien stripping and how it works, see Getting Rid of Second Mortgages in Chapter 13 Bankruptcy.)
The stripped liens will receive the same treatment as your other unsecured debts (such as credit cards) in your bankruptcy. These debts usually receive nothing or a small amount and get discharged (wiped out) at the completion of your Chapter 13 bankruptcy.
You won’t be required to pay more if you strip a lien because the unsecured creditors must share a particular pool of money—usually your disposable income. For more specific information, you’ll want to read about the Chapter 13 repayment plan.
After discharge, the lender whose lien was stripped will be required to remove its lien from your house.
(Learn why lien stripping isn’t available in Chapter 7 bankruptcy.)
]]>Although the particular process of letting go of your house in Chapter 13 bankruptcy can vary in different jurisdictions, it usually entails nothing more than proposing a new payment plan that removes the mortgage and the arrearages. These expenses will no longer be one of the secured debts paid by the Chapter 13 trustee (although some payment might be made in the form of an unsecured debt). If no interested party objects the proposed surrender, the bankruptcy judge will most likely approve the new plan.
Some lenders don’t move forward with foreclosures quickly—often in an attempt to avoid the expense to purchase, maintain, and sell the property. The problem is that a cash-strapped homeowner will remain responsible for the property taxes, homeowner’s association dues, and upkeep of the property until it changes hands.
In an attempt to overcome this issue, some debtors (the person filing the bankruptcy) have filed Chapter 13 plans containing a special provision that allows property ownership to transfer to the lender automatically when the bankruptcy court confirms the plan. If this transfer is spelled out in the proposed plan and the creditor doesn’t object, some bankruptcy courts have concluded that the confirmation order transfers title to the lender without a need for a foreclosure process or even a deed (check with a local bankruptcy attorney).
At confirmation, the plan becomes a contract between you and your creditors. While some courts will allow you to surrender the house after confirmation, others will not. In fact, some courts have held that debtors lose the right to surrender their property after confirmation, which can produce a harsh result if the property loses value or suffers damage that a debtor cannot repair. It might leave you with few alternatives except foreclosure. In that case, here are some actions that will get you a similar result.
If you are no longer trying to keep your house, a Chapter 7 bankruptcy might be a quick way to get rid of dischargeable debt, such as credit card bills, without paying into a repayment plan. The tricky part about this approach is that you’ll need to qualify for a Chapter 7 discharge by passing the means test.
The complicated nature of Chapter 13 matters makes this area of bankruptcy difficult for most individuals to handle on their own. Compounding the complexity is the fact that not all courts handle issues in the same way. It’s strongly suggested that you consult with a local bankruptcy lawyer familiar with the practices in your area.
]]>Chapter 13 bankruptcy works by allowing you to catch up on certain payments. You propose a repayment plan, and if the court confirms (approves) it, you’ll make monthly payments over the course of three to five years. By contrast, while a Chapter 7 bankruptcy is much quicker—usually wiping out debt in a matter of months—a Chapter 7 case doesn’t offer a way for you to keep property that you’d lose after falling behind on a payment.
Even though you’re paying mortgage arrearages through a Chapter 13 plan, you can still work with your lender to modify your mortgage. It’s not at all unusual for a borrower to file a Chapter 13 case to stop a foreclosure and then apply to the mortgage company to modify the terms of the loan.
When you’re applying for a modification, you’re asking the lender to change the terms of the loan. Your interest rate could be adjusted, and therefore the monthly payment reduced, or your missed payments could be added to the end of your mortgage, thereby increasing its length. When the modification goes into effect, your mortgage will be current.
You’ll have to present your modification to the bankruptcy judge for approval. Most judges will approve the plan if the new terms are reasonable. Next, you’ll propose a new Chapter 13 payment plan that removes the mortgage arrearages and any other debt included in the new mortgage, like past due property taxes. You’ll continue making your new mortgage payment and your new Chapter 13 plan payment until you reach the end of your plan term, after which you will enjoy the benefits of your Chapter 13 discharge.
Once you have new mortgage terms in place, your attorney will help you decide whether it makes sense to continue your Chapter 13 case. Because all your debts get included in some way, it will depend on if the Chapter 13 plan addresses issues other than your mortgage. Here are some questions to consider to determine whether there are benefits to managing your debt by staying in the case:
If you choose to dismiss your Chapter 13 plan, you won’t have the protection of the bankruptcy court. You’ll be free to work with your creditors on your own, but your creditors will also be free to take whatever collection actions are allowed to them under state and federal law.
]]>Let's look at how Chapter 13 bankruptcy affects foreclosure proceedings, your mortgage obligations, and more.
If you are behind on your mortgage payments, and cannot get current, Chapter 13 bankruptcy may be a good way to save your home. In Chapter 13 bankruptcy, you pay all or a portion of your debts over time through a repayment plan. Chapter 13 bankruptcy lets you pay off a mortgage "arrearage" (late, unpaid payments) over the length of the repayment plan -- usually three or five years, depending on your income and the time it will take you to meet all the plan's requirements.
In order for this option to work, you'll need enough income to at least meet your current mortgage payment and your other basic expenses at the same time you're paying off the mortgage arrearage. Assuming you make all the required payments up to the end of the repayment plan, you'll avoid foreclosure and keep your home. (Note: Although Chapter 13 bankruptcy's provisions can be used to prevent foreclosure in the long run, Chapter 7 bankruptcy provides a temporary relief from foreclosure that can sometimes lead to a long-term solution. To learn if you can use Chapter 7 bankruptcy to save your home, see Nolo's article Your Home in Chapter 7 Bankruptcy.)
As mentioned, Chapter 13 bankruptcy may help you eliminate the payments on your second or third mortgage. That's because if your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value), you may no longer have any equity with which to secure the later mortgages. If this is the case, the bankruptcy court may "strip off" the second and third mortgages and recategorize them as unsecured debt --which, under Chapter 13 bankruptcy, takes last priority. Unsecured debts are usually not paid in full in Chapter 13 bankruptcy and sometimes do not have to be paid back at all. (Learn more about stripping off second mortgages in bankruptcy.)
When you file a Chapter 13 bankruptcy petition, all foreclosure proceedings must stop (with one exception, discussed below) until your Chapter 13 repayment plan is approved by the court. This is called the "automatic stay." If your repayment plan includes provisions for paying off your mortgage arrearage, then once the plan is confirmed (approved by the bankruptcy judge) the lender is bound by the plan and cannot continue with the foreclosure, assuming you make your regular mortgage and bankruptcy plan payments.
If your repayment plan does not include provisions to pay off your mortgage arrears, then once the court approves the repayment plan, the lender may continue with foreclosure proceedings. If you don't want to keep your home as part of the Chapter 13 bankruptcy, filing for bankruptcy will give you a reprieve from foreclosure of at least several months, during which time you can continue to live in your home. In addition, since most bankruptcy judges give debtors several chances at proposing a feasible repayment plan, the confirmation process may take a long time -- giving debtors an even longer respite from foreclosure. (However, if it appears that you'll never propose a feasible repayment plan, the confirmation process can be greatly shortened.)
There is one exception to the automatic stay. If you have filed another bankruptcy petition within the previous two years, and that filing resulted in the automatic stay being lifted at the request of the party seeking a foreclosure, the filing of this Chapter 13 bankruptcy will not halt foreclosure proceedings. This is to prevent people from filing a series of bankruptcy petitions just to stall foreclosure. (To learn more about the automatic stay, see Nolo's article How Bankruptcy Stops Your Creditors: The Automatic Stay.)
Chapter 13 bankruptcy allows the bankruptcy court to modify some debts secured by property if the amount you owe is greater than the value of the property. The amount of the debt equal to the value (or equity) of the property remains secured (meaning the collateral can be taken to pay the debt if you don't make the payments). The remainder of the debt becomes part of your unsecured debt and is treated as a nonpriority debt (which means you will pay less, or even none of it, in your repayment plan). This is called a "cramdown." For example, let's say your loan is for $300,000 and the property value is only $200,000. If the loan is eligible for a cramdown, $200,000 remains secured by the property and the remaining $100,000 is added to your unsecured debt.
For the most part, you cannot cram down a mortgage on your residence. However, cramdowns are allowed if:
If one of these exceptions applies, the court may cram down the loan, but you will have to pay off the entire crammed-down loan through your Chapter 13 repayment plan. For this reason, even if you meet one of the above exceptions, mortgage cramdowns rarely make sense unless you will have the capacity to make a balloon payment at the end of your plan. (Learn more about cramdown in Chapter 13.)
To learn more about Chapter 13 bankruptcy and how it can help you avoid foreclosure, get Chapter 13 Bankruptcy: Keep Your Property & Repay Your Debts Over Time, by Attorney Cara O'Neill).
If you are trying to save your home and are in jeopardy of foreclosure, get The Foreclosure Survival Guide, by Attorney Amy Loftsgordon).
For help on choosing a good bankruptcy lawyer, go straight to Nolo's Lawyer Directory for a list of bankruptcy attorneys in your geographical area.
]]>Each of these Chapter 13 benefits are described in detail below.
In many ways, your Chapter 13 bankruptcy repayment plan is like a plan you might negotiate with the mortgage servicer. Either way, you have an opportunity to get your mortgage current over time. Of course, if the only reason you are filing Chapter 13 is to get time to get your mortgage current, and you could get a similar deal from the servicer, you’ll be better off not filing for bankruptcy, at least as far as your credit score is concerned.
EXAMPLE: Freddie owes $3,600 in missed mortgage payments. He receives a notice of default that gives him a month to pay up or lose his house. His mortgage servicer refuses to work with him because of a previous notice of default—the lender doesn’t think he’s a good credit risk.
Freddie had fallen behind on his mortgage because he was laid off, but now he’s working again. If he files for Chapter 13 bankruptcy and gives up one of the cars he’s making payments on, he’ll be able to afford a repayment plan, under which he will stay current on his mortgage and also make up the arrears over three years. He proposes to pay down the arrears at the rate of $120 a month: $100 for the debt plus $20 a month for the trustee’s fee.
Part of the problem in workouts with a mortgage servicer is that servicers typically add on a wide variety of fees and costs, which make it difficult for the homeowner to reinstate the mortgage. In Chapter 13 bankruptcy, you can challenge the validity of these fees and costs on a variety of grounds.
It’s important to understand that Chapter 13 bankruptcy works to keep your house only if you have enough income to make both your current payment and pay off a portion of your arrears each month (plus costs and fees). And you must propose a plan showing not only that you can make plan payments but also that you can keep current on all your other reasonable and necessary monthly expenses, such as utilities, transportation, car note, insurance, and the like. Further—and this is a deal-breaker for some would-be Chapter 13 filers—you must pay some types of debts in full during the course of the plan. For example, if you owe recent back taxes, the court won’t approve your repayment plan unless it shows that you can pay off the taxes in full while your plan is in effect.
Finally, your plan must provide for a payment to the trustee of roughly 10% of the amount of all payments you make to creditors through the repayment plan. This can be another deal-breaker if, for example, you are forced to pay your mortgage through your plan rather than directly to the lender outside of the plan. Unfortunately, there is no uniform nationwide rule on this subject—the courts are split on whether or not the trustee can force you to pay your mortgage through the plan.
EXAMPLE: Marcia proposes a three-year Chapter 13 repayment plan, under which she will pay her $2,000 monthly mortgage directly to the lender. On the basis of her disposable income (roughly, the difference between her income and her necessary expenses), she also proposes to pay the arrears she owes on the mortgage and a percentage of her unsecured debt to the trustee at a rate of $139 a month ($5,000 over the life of the plan). Under this proposal, the trustee will be paid a fee of $14 from every monthly payment (36 in all).
Unfortunately, the trustee objects to Marcia’s plan, arguing that she should pay the current mortgage (as well as the arrears) through the plan. The court allows the trustee to require her to pay the mortgage through the plan. That means Marcia must amend her plan to pay an additional $200 a month (10% of the $2,000 monthly mortgage payment) as the trustee’s fee. Because Marcia doesn’t have enough disposable income to pay another $200 every month, she is unable to propose a feasible amended plan.
Americans are up to their eyeballs in debt. It’s not uncommon for me to see clients of moderate means who owe credit card debt exceeding $50,000. If you are looking to save your house, and Chapter 13 bankruptcy might get the job done, chances are great that you’ll also greatly reduce, if not eliminate, your debt load. Chapter 13 gives you three to five years not only to work out your mortgage problems but also to deal with your unsecured debt (debt not secured by collateral) once and for all.
To eliminate credit card and other unsecured debt in Chapter 13 bankruptcy, you must be willing to commit all of your disposable income to repaying as much of the debt as you can (taking into account that you must also pay down other debts, such as mortgage arrears or recent back taxes) over a three- to five-year period. Any unsecured debt that remains at the end of your plan is discharged (canceled), unless it is one of the types of debt that survives bankruptcy, such as child support or student loans.
Disposable income is computed in two entirely different ways, depending on whether your income is above or below your state’s median income, and on which judge you end up with. For the vast majority of Chapter 13 bankruptcy filers, disposable income is the income you have left over every month after taxes and other mandatory deductions are subtracted from your wages, you pay necessary living expenses, and you make payments on your car notes and mortgages.
EXAMPLE: Terry’s net income, after mandatory deductions, is $4,000 a month. Out of this must come a mortgage payment of $1,500, a car payment of $500, and $1,800 for utilities, food, transportation, insurance, medical prescriptions, and other regular living expenses. The $200 that’s left over each month is Terry’s disposable income.
If your household income is higher than the median in your state for a household of your size, you must propose a five-year plan. Your household consists of all people who are living as one economic unit, regardless of relationships and age. Usually this means people who are living under one roof, but not always. Someone who is living apart but freely shares income with the rest of your household could still be a member of the household. For example, a person on active duty who isn’t living with you except when on leave would be a member of your household.
Your household disposable income will be partially computed on the basis of IRS expense tables that may or may not match your actual expenses. Also, your disposable income will likely be based on what you earned the past six months, not necessarily on what you are earning now. In other words, the court may rule that you have disposable income even when in fact you don’t. Weird? You bet, and many commentators, including bankruptcy judges, have said so. Nonetheless, this is the result Congress apparently intended in its landmark bankruptcy legislation of 2005.
If your household’s income is lower than the median income for a similarly sized household in your state, you can propose a three-year repayment plan. However, you can request that the court approve a five-year plan if you need the extra time to meet your payment obligations. For example, say you must pay unsecured creditors $25,000 under your plan. If your plan lasts for three years, you would have to pay $692 a month (plus certain administrative expenses). With a five-year plan, you would pay only $411 a month.
To determine whether you are a high-income or low-income filer, you first compute the average monthly gross income you received from all sources, taxable or not (except for funds received under the Social Security Act) during the six months that immediately precede the month in which you will be filing for bankruptcy. You then multiply that figure by 12 and compare the result with your state’s median income.
EXAMPLE: Justin plans to file for Chapter 13 bankruptcy in June. He lives in California and has four people in his household. He will have to compute his average gross income from all sources (except Social Security) for December of the previous year through May of the current one. It comes out to $6,000 a month. He multiplies this figure by 12 for an annual figure of $72,000. Because the median income for a California family of four is more than $76,000, he qualifies as a low-income filer.
Get free help online. You can use http://www.legalconsumer.com/ to help you make these calculations and comparisons. The median income figures change at least once a year.
It’s important to know that you can propose a Chapter 13 plan even if you have very little disposable income to pay down your unsecured debt, and even if you pay off only a small fraction of that debt.
EXAMPLE 1: Rubin owes $36,000 in unsecured debt, consisting of credit cards and personal loans. His income is below the median for his state, and he has $200 disposable income left each month over after paying all his living expenses and monthly contractual debt (a $1,000 mortgage and a $450 car loan). Rubin successfully proposes a plan that will pay his unsecured creditors $200 a month for 36 months. It comes to a total of $7,200, which is 20% of his unsecured debt. The rest will be discharged if he completes the plan.
EXAMPLE 2: Lynn also has $200 of disposable income each month. She has both unsecured debts and $3,000 in missed mortgage payments. In her Chapter 13 repayment plan, a portion of her disposable income will be used to make up some missed payments, and the rest will go to her unsecured debt. For example, if she has a three-year plan, $83 a month would go for the missed payments, and the other $117 would go to repay 12% of the unsecured debts.
Nothing in the bankruptcy law requires a minimum percentage of repayment; it’s left up to the judge. Some bankruptcy judges will accept plans that pay even a smaller percentage of unsecured debt than shown in these examples. In fact, some plans have been approved that pay 1% or even less. But some judges won’t approve a plan unless it provides for repaying a certain higher minimum percentage of debt.
Chapter 13 bankruptcy judges can reduce (cram down) certain secured debts to the market value of the collateral that secures the debt. They can also reduce interest rates to the going rate in bankruptcy cases (roughly 1.5 points above the prime rate). If you can get the judge to reduce your payments on a secured debt, you will have more money to pay towards your mortgage—and a better shot at proposing a Chapter 13 plan that the court will confirm.
EXAMPLE: Allison bought a new car for $24,000, taking a seven-year note for $38,000 (including the principal and interest), with monthly payments of $475. Three years later, when Allison files for Chapter 13 bankruptcy, she still owes $24,000, even though the car’s market value has fallen to $14,000.
As part of her Chapter 13 plan, Allison asks that the note be crammed down to $14,000 and that the interest rate on her loan be reduced to 4%, the approximate going rate in bankruptcy cases. The court approves this cramdown, and Allison’s monthly car payment is cut roughly in half.
A cramdown is usually available only for:
You can fight a foreclosure whether or not you file for bankruptcy. But if you file for Chapter 13 bankruptcy, you can ask the bankruptcy court to decide whether the facts upon which a proposed foreclosure is based are erroneous.
For example, suppose you contest the foreclosure on the ground that your mortgage servicer failed to properly credit your payments. A court decision in your favor on this point would eliminate the basis for the foreclosure should you later drop your Chapter 13 case or convert it to a Chapter 7 bankruptcy. (Remember, you aren’t confronted with the foreclosure itself while you are in Chapter 13 bankruptcy unless the lender seeks and gets court permission to lift the stay.) Unlike some state courts, the bankruptcy court is a comparatively friendly forum for homeowners challenging foreclosures.
If you’re like many homeowners, your home is encumbered with a first mortgage, a second mortgage (often used for the down payment in an 80-20 financing arrangement), and even a third mortgage (maybe in the form of a home equity line of credit). Most likely, the holder of the first mortgage is pushing the foreclosure. But if you have fallen behind on your first mortgage, you are probably behind on your second and third mortgages as well. Would it help you keep your house if you no longer had to pay the second or third mortgage? You know the answer: Lightening your overall mortgage debt load could only help you meet your first mortgage obligation.
One of the great features of Chapter 13 bankruptcy is that in many (but not all) bankruptcy courts you can get rid of (strip off) all mortgages that aren’t secured by your home’s value. Let’s say that you have a first mortgage of $300,000, a second mortgage of $75,000, and $50,000 out on a home equity line of credit. Presumably, the value of your home when you took on these debts was at least equal to the total value of the mortgages, or $425,000. But if the house is now worth less than $300,000, as a practical matter the house no longer secures the second and third mortgages. That is, if the house were sold, there would be nothing left for the second or third mortgage holders.
If your second and third mortgages were considered secured debts, your Chapter 13 plan would have to provide for you to keep current on them. However, when they are stripped off, they are reclassified as unsecured debts. This means you have to repay only a portion of them—just like your other unsecured debts. And as explained earlier, the amount of your disposable income, not the amount of the debt, determines how much of the unsecured debt you must repay.
EXAMPLE: Sean files for Chapter 13 bankruptcy and proposes a three-year plan to make up his missed mortgage payments. He also owes $60,000 in credit card debt and has disposable income of $300 a month. His house’s value is $250,000. He owes $275,000 on his first mortgage, $30,000 on the second, and $15,000 on a home equity loan.
Because his house’s value has fallen below what he owes on the first mortgage, there is no equity left to secure the second mortgage or home equity loan. So his Chapter 13 plan would classify these two formerly secured debts as unsecured. When they’re added to the $60,000 in credit card debt, he’s got a grand total of $105,000 unsecured debt. Because all he has is $300 per month in disposable income, his plan would repay a little more than 10% of his unsecured debt—including a little over 10% of his formerly secured second and third mortgage debt.
This also means that under your Chapter 13 plan you won’t have to make up payments missed on your second or third mortgages. And because you’re no longer making current payments on the second or third mortgage, the total amount you pay each month will be reduced by a considerable amount.
Find out whether your court will let you get rid of liens. Although eliminating a lien when there is no equity to secure it is logical and permitted by many courts, some courts refuse to allow it. They reason that stripping a lien from a house is tantamount to modifying a residential mortgage, something that is not allowed by the bankruptcy laws. At some point, this issue is likely to be resolved by higher federal appellate courts. For now, if this is a major reason you are considering Chapter 13 bankruptcy, you need to know how your court would address it. Contact a local experienced bankruptcy attorney to get that information.
]]>Lien stripping is a Chapter 13 bankruptcy tool that allows people who are upside down (meaning their mortgage exceeds the value of their house) on their house to get rid of their junior liens, such as second or third mortgages. Through a lien strip, the bankruptcy court essentially takes your second mortgage (which is a secured debt where the lender can foreclose on your property if you miss your payments) and converts it to an unsecured debt (just like a credit card debt) by ordering the lender to remove its lien from the property.
You can only strip your second mortgage or other junior liens if the amount of the senior liens on the property exceeds the home's market value. For example, if you have a first and a second mortgage on your house, your first mortgage balance must be more than what your house is worth before you can get rid of your second mortgage.
If you have three mortgages, you can strip your second and third mortgages if your first mortgage is greater than the value of your house. However, if your house is worth more than your first mortgage alone but not more than the combined balance of your first and second mortgages, you can only strip your third mortgage.
Example. Assume your house is worth $200,000. You have a $250,000 first mortgage, a $50,000 second mortgage, and a $30,000 HELOC. In this case, since your first mortgage is greater than your house value, you can strip your second mortgage. Similarly, you can get rid of the $30,000 HELOC as well. However, if your house were worth $275,000, you would have equity above and beyond your first mortgage. You could strip the HELOC but not the second mortgage.
The lien attached to the second mortgage or other junior secured debt is removed, which allows the debt to be reclassified as nonpriority unsecured debt, like medical and credit card debt. You pay your disposable income toward your unsecured debt through your Chapter 13 plan. Because nonpriority unsecured debts must share your disposable income, you usually pay little toward these debts. But not always. It will depend on how much income you make. If you complete the plan, anything left on the mortgage is discharged (wiped out).
On June 1, 2015, the Supreme Court of the United States held in Bank of America, N.A. v. Caulkett that a bankruptcy filer cannot strip off a junior mortgage lien in a Chapter 7 case. You can view the case here.
]]>Almost all states let residents who file for bankruptcy protect some amount of equity using a homestead exemption. However, the extent of that protection varies.
In some states, such as Florida, the entire homestead is protected regardless of value. Iowa and Texas have liberal exemption statutes, as well. By contrast, in other states, such as Kentucky, the homestead protection can be as little as $5,000. Alabama’s homestead exemption is $15,000 (as of September 2017—these amounts change periodically).
(Find out more in Bankruptcy Exemptions by State.)
To determine whether you’ll be able to protect your home, you’ll need an accurate home valuation. Next, you’ll deduct the mortgage balance and determine the equity. If the equity is less than the amount of the homestead protection available, your house will be protected in bankruptcy.
When you can’t protect all of your equity, what happens next depends on the bankruptcy chapter you file:
(To learn more, see Your Home and Mortgage in Chapter 13 Bankruptcy and Your Home in Chapter 7 Bankruptcy.)
When you fill out the bankruptcy forms, you’ll be asked to provide the “current value” of your home on the date that you file for bankruptcy. Another term for current value is “fair market value,” which is the amount that a seller who isn’t pressured to make a purchase would agree to pay for the home.
You can use different ways to determine the value of your home before you file for bankruptcy. The most important thing to keep in mind, however, is that your valuation isn’t the deciding factor. The bankruptcy trustee appointed to oversee your case will also be determining the value of your home, as well. If there’s a disagreement, a bankruptcy judge will review the basis for both valuations and make a final decision.
A full appraisal will give you the most accurate value for your property. If you refinanced your home or modified your loan, you might have a recent appraisal. What is considered a recent appraisal will depend on current housing climate.
To get a full appraisal, you hire a licensed real estate appraiser who inspects your property and prepares a lengthy report, containing information on your home and information on sales of comparable homes. Based on that information and any other factors the appraiser finds necessary, the appraiser will set a value and explain the valuation.
A full appraisal is the most expensive option. It isn’t needed in most routine bankruptcy cases. They are necessary, however, if you plan to try to strip the second mortgage on your property in a Chapter 13 bankruptcy. (See Getting Rid of Second Mortgages in Chapter 13.)
This is less expensive than a full appraisal and might provide you with an accurate home valuation when preparing your bankruptcy paperwork. Under this option, a licensed realtor will compare your house to other homes sold in your area. A market analysis will use data from the sales of homes that are located close to yours and are similar in size, style, and condition.
These might be useful if you have a high mortgage amount and you believe that the homestead protection to you will be more than sufficient to protect your property. The information you can obtain might provide you with confirmation of your understanding of your home’s value. If not, you can get a more formal valuation, if necessary.
Realtor.com and Trulia.com are two places to start. Your local trustee will likely prefer a particular site (and view others with more skepticism). It might be useful to contact the local branch of the U.S. Trustee’s office for clarification.
There are some valuation methods which are not reliable for bankruptcy purposes and should not be used.
Your locality may have a property tax appraiser that values your property for real estate tax purposes. These valuations are rarely utilized in a bankruptcy proceeding. The property tax appraiser will often use methods that are not acceptable appraisal methods for sale purposes and often the value is not an accurate representation of the market value of the home.
This valuation method which produces a lower value based on a need to dispose of property quickly is not readily applicable to real estate. A bankruptcy trustee will sell a house the same way a homeowner would—by hiring a real estate broker to market the property. As a result, a "quick sale" value is not helpful to you when you are considering bankruptcy. Also, if you rely on an artificially deflated value, you might incorrectly assume you can keep your home. It’s important to get it right because many Chapter 7 bankruptcy judges won’t let you dismiss your case just because it turns out that you’ll lose property that you thought you’d be able to keep.
]]>