A Chapter 13 Bankruptcy is a powerful tool to potentially save your home. Upon a bankruptcy filing, any foreclosure lawsuit is stayed or put on hold.
Once a person gets behind on their mortgage, it is incredibly difficult to become current. However, a Chapter 13 Bankruptcy can solve this problem. From the funds you pay to the trustee as part of your bankruptcy repayment plan, the trustee will pay the past due amount (called the arrearage) to your mortgage company over the life of your bankruptcy plan.
The amount you pay to the mortgage company for the arrearage is calculated by dividing the amount past due by the number of months in your plan (anywhere from 36 month to 60 months) and it is included in your monthly trustee payment. For example, if your mortgage is past due by $10,000 and your bankruptcy plan is for 57 months, the plan will direct the trustee to pay $176 per month to the mortgage company.
After the bankruptcy is filed, you are required to make your regular mortgage payment on time each month. This is very important. When you have made all your Chapter 13 payments to the trustee, you will be current with your mortgage.
No Change in Mortgage Payments. Unfortunately, the current laws do not allow the bankruptcy court to change your regular mortgage payment or interest rate. We are hoping this will change, but are not holding our breath. Bank lobbies are powerful and well-funded.
Mortgage Modifications. We have recently seen mortgage companies offer mortgage modifications to people in bankruptcies. If you struggle to pay the regular mortgage payment, I recommend that you continue to work with your mortgage company after filing bankruptcy to see if you are eligible for one of the many modification programs. If you succeed in getting a loan modification after a bankruptcy filing, you are required to seek permission from the bankruptcy court. Immediately contact your bankruptcy attorney if you qualify for a modification.
Stripping Off 2nd Mortgages or HELOC’s. You may be able to “strip off” your 2nd mortgage or home equity line of credit in a Chapter 13 and make the debt unsecured. If your home is worth less than the first mortgage, then it may be possible to pay stop paying the 2nd mortgage, discharge the debt and have the 2nd mortgage released after successful completion of your Chapter 13 plan. There may be additional legal fees for this matter; however, the savings may well be worth it. To prove the value of your property, you will need to get an appraisal.