Foreclosure versus Chapter 7 versus Chapter 13

Last week I responded to a quest as to which was better, “Bankruptcy versus Foreclosure”. And in typical lawyer fashion, I said it was the wrong question. Actually, one must decide between a Chapter 7 and a Chapter 13. You can see that last post for the explanation of why. A Chapter 7 would be preferable if you either do not want to keep the house or if you cannot afford to keep the house. A Chapter 13 is preferable if you want to keep the house and can afford it with help.

In a Chapter 13, you can ‘force’ your home lender to let you catch up the arrears (past due amounts plus certain pre-petition fees) over the course of up to 60 months. The lender has to let you start paying the regular loan payments during the bankruptcy so long as the plan payments you propose are feasible and cover all the arrears. They cannot charge interest on those arrears (at least not in the Eastern District of Kentucky) and only certain other post-petition fees are allowed.

For a plan to be feasible, you have to show in your Schedule I and Schedule J (income and expenses or “budget”) that you can pay a large enough plan payment that all those arrears will be satisfied. In considering your budget, you exclude any unsecured debt you are currently trying to pay, such as credit cards or old doctor bills.

So, if you want to keep your house and you can engage in sufficient belt-tightening to pay the arrears over 60 months so long as all your unsecured debts essentially go away, then you should consider a Chapter 13. An added benefit for a few home owners is that a second mortgage might get stripped off entirely. I will write more about that in the next post.