Wife’s Chapter 13 could save couple’s home

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Dear Bankruptcy Adviser,
Our house is set to be sold at a foreclosure sale. We have been trying to get a home loan modification, but without luck. I’m thinking of filing for Chapter 13 by myself, not including my husband so his credit doesn’t get ruined. Will this stop the foreclosure sale and allow us to keep the house?
— Ann

Dear Ann,
Your action plan can work out fine. Yes, you can file a bankruptcy prior to the sale of the property and the bankruptcy filing can stop the pending sale.

From the beginning, I must say that this question is very difficult to answer without much more information. One issue that is hard to address is that some states follow community property law and others don’t. Community property is a form of co-ownership of property and income between husband and wife. That being said, I have successfully filed cases like yours, but only after a careful and thorough review.

To keep the house, you may have to file a Chapter 13 bankruptcy. A Chapter 13 bankruptcy allows you and your family to undergo a financial reorganization. In a Chapter 13 bankruptcy, you will set up a payment plan between you and your creditors that is monitored by the court. The plan will last from three to five years. You, as the homeowner, may keep your property so long as you make the payments according to the court’s terms.

Some of my clients have chosen to file a Chapter 7 bankruptcy with the hopes of working out a loan modification with the lender. This is a potentially dangerous option because the lender might reject the loan modification and proceed to sell the house during an active Chapter 7 bankruptcy, or afterward.

Even if you file on your own, with some possible exceptions, your husband’s assets will have to be included in the filing. Also, his income must be included.

Here are a few other major issues you should consider.

One, does your husband have debts in his name only? You will have to live very modestly while inside the Chapter 13. Almost every available dollar must be paid to your creditors that are listed in the bankruptcy paperwork. When a nonfiling spouse (your husband) has outstanding debts in his name only, he will still have to make those payments. Those payments could be high enough to make your Chapter 13 case difficult, if not impossible, to manage.

Two, besides the first mortgage, do you have a second or third mortgage (these are generally called junior liens) and is your husband’s name on them? In some Chapter 13 cases, you are able to eliminate a junior lien. If you plan to eliminate a junior lien but your husband’s name is also on it, he could be liable for that debt after your Chapter 13 bankruptcy is over.

Three, do the two of you have other debts that are in both your names? You don’t necessarily pay back all of your outstanding bills in a Chapter 13. Depending on your income and expenses, you might not be paying back much of your debt at all. If your husband’s name is on any of the accounts, creditors may pursue him after your bankruptcy is over. Just because you filed bankruptcy does not mean he is forever shielded from his obligations.

In some cases, I have seen creditors pursue the nonfiling spouse while the filing spouse is inside an active bankruptcy. There is a remedy to handle this, but it could be costly and might jeopardize a successful Chapter 13 bankruptcy.

In short: Yes, you can file Chapter 13 on your own — without ruining your husband’s credit. Just deliberate these concerns first.

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