Although Chapter 13 is often the go-to prescription for hanging onto a home in financial distress, like most strong medicine it comes with side-effects. The simpler Chapter 7 “straight bankruptcy” may be the better solution for both short-term relief and long-term financial health.
Chapter 13, the three-to-five year version of consumer bankruptcy, arms you with a remarkable set of tools for dealing with your mortgage lender and with other creditors related to your home. I’ll talk about them in upcoming blogs.
But you should absolutely not enter into a Chapter 13 case without understanding it thoroughly and considering it very practically. The fact is that a large percentage of them do not make it all the way to completion, often wasting the debtors’ money and delaying for years their final relief from creditors. Chapter 13 is awesome medicine, but only for the right patients in the right circumstances.
So in what circumstances should you very seriously consider Chapter 7 instead of Chapter 13?
1. If you are behind on your mortgage payments, but could realistically catch up on that arrearage within about a year—after writing off the rest of your debts in Chapter 7, and being very disciplined during that one year: Depending on your lender, your payment history, and similar factors, most mortgage lenders will allow you to enter into a “forbearance agreement” after you file a Chapter 7 case. That agreement allows you to stay in your home and to catch up on your mortgage arrearage by paying a certain amount extra per month. Given the cost savings of a Chapter 7 over a 13, and the benefit of getting to your fresh start in a year instead of three to five years, you should very seriously consider with your attorney whether that one year of extra effort would 1) be doable, and 2) be worth the effort and risk.
2. If your chances of keeping your house through a Chapter 13 case are unrealistic: As powerful as Chapter 13 is, it certainly has its limitations. Think long and hard about whether you will be able to consistently meet the terms of your proposed payment plan. Consider your deeper motivations and fears, and you may find better ways of meeting your and your family’s true needs. With the helpf of your attorney try to ground yourself with brutal honesty about what is realistic in the short term and also two or three years out. Although “desperate times call for desperate measures,” a desperate mind doesn’t tend to make wise choices. Chapter 13 should almost never be a “Hail Mary pass,” a last-ditch long-shot. Be very clear about the consequences of that long-shot not panning out, and you may well realize it’s not worth it.
So, aim towards a Chapter 7 instead of a Chapter 13 case if you really don’t need the extra length of time and other benefits that Chapter 13 provides. And the same thing if you are trying to hang onto a house that you very likely can’t hang on to even with all the help that Chapter 13 provides.