Chapter 13 bankruptcy provides several opportunities for homeowners facing foreclosure to save their homes. Through Chapter 13, you can pay off mortgage arrears over a three to five year period, possibly eliminate second or third mortgages, or delay an eventual foreclosure. Here’s how Chapter 13 works, and how it can help homeowners in foreclosure. (To learn more about Chapter 13 bankruptcy, see Chapter 13 Bankruptcy.)
The Automatic Stay: A Temporary Stop to Foreclosure
When a debtor files bankruptcy the automatic stay immediately becomes effective. The automatic stay prohibits creditors from making any collection efforts against a debtor. If a debtor is facing foreclosure, the automatic stay prevents the mortgage company from initiating or moving forward with the foreclosure.
If the mortgage company wishes to resume collection efforts, including foreclosure, against a debtor, it must first file a Motion for Relief from Stay seeking authorization from the court to do so. If the bankruptcy court grants the motion, the mortgage company is free to proceed with the foreclosure and any other remedies it may have under the law.
Keeping Current on Mortgage Payments in Chapter 13
If you want to keep your home, you must continue to make your monthly mortgage payments during and after your Chapter 13 bankruptcy case. You make the payments to your mortgage lender (or mortgage servicer), not to the bankruptcy trustee.
How Are Mortgage Arrearages Handled in a Chapter 13 Case?
In Chapter 13 bankruptcy, you can pay off the "arrearage" (late, unpaid payments) over the length of your Chapter 13 repayment plan – which lasts from three to five years. In order for this to work (and for the court to approve your plan), you’ll need enough income to make your currently monthly mortgage payments and to make your Chapter 13 plan payments. If you make all of the repayment plan payments and keep current on your mortgage, you’ll be able to keep your home.
Eliminating Second and Third Mortgages in Chapter 13
In certain circumstances you might be able to get rid of second and third mortgages or other home equity loans through Chapter 13 bankruptcy. This could happen if these mortgages and loans are no longer secured by your equity in the property. If your equity doesn’t cover those mortgages, the bankruptcy court can “strip off” the loans and recategorize them as unsecured debt. This debt then gets get lumped with your other unsecured debt which you pay off (in whole or in part) through your Chapter 13 plan. Most chapter 13 filers end up paying less than the full amount of their unsecured debt through the repayment plan. To learn more about how this works, see How to Strip a Second Mortgage or HELOC in Chapter 13.
If you have questions about how to save your home in bankruptcy, or by using nonbankruptcy alternatives, consult with a good self-help manual like Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Margaret Reiter (Nolo). Or consult with a local bankruptcy or foreclosure attorney.