How Does Chapter 13 Help Stop Foreclosure?
Once you file for Chapter 13 bankruptcy relief, the court will place an automatic stay, which protects your property from lender actions. Therefore, your lenders, including mortgage lenders, cannot take any action, including foreclosure, to recover the debt. Once the court places an automatic stay, the mortgage company must cease all attempts to collect the debt. Therefore, if they had started foreclosure or threatened to start one, they could not proceed.
Filing Chapter 13 bankruptcy thus helps stop foreclosure and helps you retain your home. You can include your mortgage payments in your repayment plan to catch up with due payments and continue making your current payments, ensuring you keep your home.
Besides helping with your outstanding mortgage payments, Chapter 13 bankruptcy can also help with other debts. It can lower your car payments, and get other unsecured debts discharged, leaving enough to afford your mortgage payments.
Note: Chapter 13 can only lower your car payments. It cannot reduce your mortgage balance or lower your mortgage payments.
How Can I Pay My Mortgage Arrears if I File Chapter 13 bankruptcy?
Since you will also be making payments towards your other debts while in Chapter 13 bankruptcy, most debtors are worried about how they can continue making payments and still catch up with their mortgage arrears.
Chapter 13 helps homeowners pay their mortgage arrears through a monthly plan. The outstanding mortgage payments will be included in your repayment plan. You have a maximum of 60 months to repay your debts under Chapter 13, although some individuals qualify for 36-month plans. The arrears will be spread throughout your plan, ensuring you can keep up with your payments and keep your home.
Despite filing for bankruptcy, you must continue making payments towards your mortgage outside the payment plan. In case you fall behind on your payments again, your mortgage lender might file a petition with the bankruptcy court, requesting modification of the automatic stay.
If the court grants your mortgage lender's petition and agrees to modify the automatic stay, they can resume foreclosure while you're in Chapter 13. Thus, keeping up with your mortgage payments is important to avoid losing your home.
What if I Have More than One Mortgage?
It is not uncommon for people to have more than one mortgage. If you have several mortgages, you can still file for Chapter 13 and pay your outstanding payments on your mortgages. However, the rules remain the same. You must continue paying your mortgage lenders outside the Chapter 13 payment plan.
Depending on your priorities, you can also get rid of the other mortgages for pennies on the dollar. Assuming you have two mortgages, and your first home is worth less than your outstanding mortgage, you can ask the court to value the second mortgage at zero. However, you cannot ask the court to value the second mortgage at zero if your home is worth more than you owe on the initial mortgage, even if it is worth $1 more.
If the court approves your motion and values the second mortgage at zero, the mortgage now becomes an unsecured debt.
So, when making your monthly payments to unsecured creditors, your second mortgage lender will receive the same percentage other unsecured creditors receive. For example, if, according to your payment plan are paying 10% to your unsecured creditors, then you will, be paying 10 cents on the dollar to your second mortgage lender. Once complete your payment plan, as an unsecured debt, the second mortgage lien will be canceled.
What if I Have More Equity in the Home than the Homestead Exemptions?
How much equity you have in your home will play a role in Chapter 13 foreclosure. The homestead exemptions vary from state to state. Fortunately, homestead exemptions in most states are higher than federal homestead exemptions. So, discuss with a bankruptcy attorney how much equity you have in your home, the homestead exemptions in your state, and how much equity you can protect under Chapter 13 bankruptcy.
Keep Your Home by Filing Chapter 13 Bankruptcy
One of the major advantages a Chapter 13 bankruptcy case offers over Chapter 7 bankruptcy is the ability to retain your property. In Chapter 13, the trustee will not liquidate your assets, and they cannot sell property with non-exempt equity. Nevertheless, you are required to include the non-exempt equity in your repayment plan.
Your unsecured lenders must receive at least the same or more than they would have if you filed Chapter 7. With Chapter 13 bankruptcy, you get to keep your home as long you afford your payments. So, the equity remains in the house.
If you would like to understand homestead exemptions, go through our blog, which discusses homestead exemptions at length. In this article, we will briefly discuss how these exemptions affect your plan payment during Chapter 13 foreclosure.
Example of How Net Equity Will Affect Your Chapter 13 Plan Payment
To explain this, let us use a case scenario. Suppose you own a home with a net equity of $4,435 after deducting exemptions, mortgage payoffs, commissions, and other costs. In this case, your creditors must receive $4,435 or more through your payment plan under Chapter 13 because they would have received that amount if you had filed Chapter 7 bankruptcy. In Chapter 13, this amount will be distributed.
For example, if your plan is spread over 60 months, you will be repaying at least $74 every month. So, assuming your payment plan allocates $100 to pay unsecured lenders every month, then the equity in your home will not affect your payments.
Now, assuming you have considerable equity in your home, higher than the allowed exemption, the equity you have in your home will affect your Chapter 13 plan payment. For example, assuming you own a home and have $100,000 equity on the home. If your plan is spread over 60 months, you will make a monthly payment of $1,667. For most debtors, this is high and will affect their ability to continue their payments. Luckily, most debtors don't have equity higher than the allowed exemption in their state.
Note: You cannot pay your unsecured creditors more than you owe. So, if your unsecured debts total $50,000, your monthly payment towards your unsecured debts will be around $834, irrespective of how much equity you hold on your home. If you have high equity in your home, discuss it with a bankruptcy attorney. They can recommend the best course of action.
Should I File Chapter 13?
You understand how filing Chapter 13 bankruptcy can stop foreclosure, but is that enough reason to file? Reach out if you have any questions or view examples of payment plans to see if it looks like a good route for you.
