Chapter 13 Bankruptcy: A Homeowners Bankruptcy

Financially distressed homeowners should not overlook a powerful tool for saving their homes from foreclosure: Chapter 13 bankruptcy.

How Chapter 13 Can Help

First, it's important to know the basics of Chapter 13. Unlike Chapter 7, Chapter 13 does not involve liquidating, or selling, the debtor's assets and distributing the proceeds to creditors. Instead, in Chapter 13, a repayment plan is developed under which the debtor will pay as much as possible to creditors for 3 - 5 years, after which remaining debts are discharged, or eliminated. Therefore, Chapter 13 is a form of bankruptcy that allows a debtor to hold onto his or her assets--like a home.

The first benefit of Chapter 13 is that once it is filed, it "stays"--or temporarily stops--all collections efforts, including foreclosure. Even if foreclosure was in process at the time, the bank will not be able to take the debtor's home--though if the foreclosure sale had been completed before the debtor files his or her bankruptcy petition, he or she will still lose the home. That's because while Chapter 13 can stop collections activities, it does not reverse those that have been completed.

The second benefit is that the debtor is given a chance to catch up on past-due mortgage payments. He or she will be able to make themselves current over a reasonable time, rather than having to catch up all at once.

Chapter 13 is Not a Magic Bullet

However, the debtor must catch up on overdue mortgage payments. And he or she must then be able to make mortgage payments going forward. If the debtor cannot or will not pay his or her mortgage, the bank will still be able to foreclose. So Chapter 13 gives a debtor a chance to keep his or her home, but it doesn't guarantee that he or she will be able to do so.

Not Everyone is Eligible

Also, Chapter 13 has more stringent eligibility requirements than Chapter 7 (liquidation). One of the chief ones is that the debtor cannot owe more than around $360k in unsecured debts, or around $1.1mm in secured debts, including mortgages, home equity loans or lines, and car loans.

How an Attorney Can Help

If a debtor is facing foreclosure and the loss of his or her home, speed is of the essence--the filing must be completed before the foreclosure sale. Filing for bankruptcy can be complex and time consuming, but an attorney can help make sure the debtor beats the bank to the finish line.