Most people struggling to keep their home know that bankruptcy is one way to avoid foreclosure. In this post, I will explain the nuts-and-bolts of how you can save your home- and cure your mortgage delinquency- through a Chapter 13 bankruptcy reorganization.
First, let me briefly explain what a reorganization is all about. It is NOT a bankruptcy in which you are simply walking away from your debts. Rather, you are proposing a plan, usually lasting three or five years, in which you will repay a portion of your debts based on your ability to repay them. Each month, you make a single payment to a bankruptcy trustee, and they pay your debts on your behalf according a plan you draft with your attorney. That plan, when approved by the Court, is binding on all your creditors.
Now, not every district is the same when it comes to mortgage delinquency. In some areas, including the Sacramento area, the trustee makes your mortgage payment, as well as repaying your arrears. This is known as a “conduit” jurisdiction, since the trustee is a conduit for your regular monthly payments. In other areas, you continue to pay your monthly mortgage payment, and the trustee only pays the portion needed to cure your arrears.
The payment is calculated as follows: First, your regular, ongoing mortgage payment remains the same. It must be paid each month. Second, your total amount of mortgage arrears must be provided for, though usually without interest or further penalties. For example, if you have a $1,000 per month mortgage payment, are $15,000 in arrears, and propose a five-year reorganization plan, your new payment to your mortgage lender will be $1,250. That is the ongoing amount, plus just enough to “cure” the arrears over five years (sixty months).
As you can see, the Chapter 13 plan operates as a kind of “reverse modification,” in that your payment is likely to go up, not down. However, being in a Chapter 13 does NOT mean you cannot apply for a loan modification. Several of my clients have entered Chapter 13 to save their homes from foreclosure, and have later gotten modifications that deal with the arrears and lower the monthly payments. If that happens, the court will usually approve a modified plan that allows you to pay the modified amount to your mortgage creditor, so you are not locked in to the higher payments of your plan.
Chapter 13 plans are not “fire and forget.” They can be modified at any time. While you are in the plan, however, your mortgage creditor cannot foreclose on you, as long as you keep making your payments according to the terms of the plan. It is a solid defensive strategy to avoid foreclosure.
One additional note about Chapter 13: if you have a second mortgage that is entirely underwater (i.e. your home would be underwater even if you didn’t have a second mortgage, but you do), most courts will allow you to “strip off” the second mortgage, and treat it as unsecured debt.
If you have taxes, car loans, or other secured debts, those might also affect your Chapter 13 plan, so you should talk to your attorney to see what the broader plan will look like in your situation. However, the basics of saving a home through Chapter 13 will be consistent with the explanation above.
Chapter 13 is usually the best solution if you are seriously delinquent due to an interruption in income or a major life event, but you have enough money to resume making your mortgage payments, plus pay a small part of your arrears each month. It is not for everyone, but in many cases, it is exactly what a homeowner needs to avoid foreclosure and keep their home.