How can I save my house? Using bankruptcy protection (Chapter 13)
Bankruptcy protection is often used to stop foreclosure and give the debtor the opportunity to restructure mortgage arrears on affordable payment terms.
When debtors fall behind on their mortgage, the bank usually insists on paying ALL past due mortgage arrears up front, or in a very short period of time, two to three months. This financial predicament is often impossible for the debtor who wants to save his house.
The alternative to bankruptcy is a Chapter 13 bankruptcy. Chapter 13 of the United States Bankruptcy Code allows the debtor the opportunity to restructure the payment of overdue mortgage arrears within three (3) to five (5) days. years. This makes it affordable for the borrower to catch up on overdue mortgage payments.
Chapter 13 bankruptcy is commonly known as a “wage earner” plan. The debtor is required to demonstrate to the Bankruptcy Court that he or she has sufficient regular recurring income or stable wages to manage the payment of a modest family budget and adequate excess income to enable the debtor to pay mortgage arrears in a time frame that not exceed five (5 years).
In some cases, mortgage arrears must be paid back with interest. This, however, depends on the provisions set forth in the loan documents that govern the borrower’s loan.
Chapter 13 also allows debtors to restructure escrow advances made by the bank. If the debtor’s bank advanced payments for property taxes, property insurance, etc., those advances may also be repaid over a term of the Chapter 13 plan, not to exceed five (5) years.
As an example, let’s say the debtor’s mortgage payment is $1,200.00 per month and the debtor is 24 months behind on their mortgage payment, and the mortgage arrears total $28,800. The debtor’s bank has initiated a foreclosure action and the bank is ready to auction the property.
When filing a Chapter 13 bankruptcy, all debt collection activity by creditors must cease, including foreclosure of the bank.
The debtor can now formulate a plan to pay off the mortgage arrears in a payment plan that works within the debtor’s budget.
When entering Chapter 13 Bankruptcy, the debtor must remain current on all monthly bills that arise AFTER the Chapter 13 filing date. Therefore, the debtor’s income must be sufficient to pay for their out-of-pocket expenses. of subsistence (mortgage, utilities, food, insurance, car payment, medical expenses, etc.) and, in addition, there must be enough excess income to pay the Chapter 13 plan payment, that is, the mortgage arrears. That means the borrower must have excess income of at least $480.00 per month above their ordinary living expenses to pay off the mortgage arrears over the next five (5) years. If this is affordable, the debtor can save their home under a Chapter 13 plan.
The Bankruptcy Court will also require the debtor to make any payments to unsecured creditors. Most courts require the debtor to pay unsecured creditors at least 20% of outstanding unsecured claims. So, in addition to paying mortgage arrears, the debtor must be able to pay a dividend to unsecured creditors. In our example, let’s say the debtor has $20,000 in credit card debt. The Bankruptcy Court would expect our debtor to pay unsecured credit card claims of at least $2,000.00 over a period not to exceed five (5) years. Therefore, the debtor’s income must be sufficient to pay his or her ordinary living expenses, mortgage arrears at the rate of $480.00 per month plus a dividend to general unsecured creditors of $33.33 per month.
As long as the debtor can pay their ordinary living expenses and the Chapter 13 plan payment, they can save their home under the protections afforded by Chapter 13 of the United States Bankruptcy Code.