Can Chapter 13 Bankruptcy Help Me Save My Home?
Well, the short answer is, “Yes!”
Chapter 13 bankruptcy is helpful to homeowners behind on their mortgage payments who need time to catch up. In Chapter 13 bankruptcy, homeowners delay or prevent foreclosure while they pay past due debt on their mortgage. (Unpaid mortgage debt is called “mortgage arrearage.”) In some cases, homeowners can also eliminate second or third mortgages.
In Chapter 13 bankruptcy, you will pay all or a portion of your debt over time using a repayment plan crafted by your attorney. Under a Chapter 13 plan, homeowners get 36 or 60 months to pay off their mortgage arrearage. The length of the repayment plan depends on your income and the total debt you have. To learn more about the Chapter 13 Plan, click here.
Chapter 13 bankruptcy is helpful to homeowners behind on their mortgage payments who need time to catch up. In Chapter 13 bankruptcy, homeowners delay or prevent foreclosure while they pay past due debt on their mortgage. (Unpaid mortgage debt is called “mortgage arrearage.”) In some cases, homeowners can also eliminate second or third mortgages.
The Automatic Bankruptcy Stay Halts Any Foreclosure Action
The automatic bankruptcy stay, 11 U.S.C. §362, stops foreclosure proceedings from the time you file a Chapter 13 petition until you complete your repayment plan. If you cannot keep up with payments, however, you may still lose your home to foreclosure. This is because your mortgage lender will petition to the court to vacate the automatic stay and allow it to proceed to foreclosure against you.
Understand the Repayment Plan - A Simple Example!
For Chapter 13 to work, homeowners need enough income to meet their current living expenses, including their monthly mortgage expense. Homeowners also need enough income to pay off their mortgage arrearage. Here’s a simple example:
If your necessary living expenses are $1,000 a month and your current mortgage payment is $1,000 a month, you need $2,000 of monthly income.
If your mortgage arrearage is $60,000, your Chapter 13 plan will call for $1,000 to be paid for 60 months. To save your home, you will need a monthly income of $3,000.
This example is unsophisticated and does not account for other expenses you’ll have, including administrative fees paid to the trustee and your attorney. But it lays out the basic structure of a Chapter 13 plan. Assuming you make all the required payments under the repayment plan, you'll avoid foreclosure and keep your home.
What About My Second or Third Mortgage?
A Chapter 13 bankruptcy can also eliminate the payments on second and third mortgages. Here’s how it works: If the entire value of your home secures the first mortgage (which is possible if the house has dropped in value), you may no longer have equity to secure a second or third mortgage. In that case, your attorney will ask the bankruptcy court to "strip" the second or third mortgage and recategorize it as non-priority unsecured debt. In Chapter 13, non-priority unsecured debts can be discharged as if you filed under Chapter 7.
Lien Stripping for Homeowners
Besides stripping second and third liens, Chapter 13 filers can modify a mortgage if the loan covers additional buildings or property, a multi-unit building, or a mobile home, or if an additional property secures it. If you meet one condition and you owe more on your mortgage than the value of your home, your attorney can move the bankruptcy court to modify the mortgage. If the court grants the motion, your debt will be reduced to an amount that corresponds to your equity in the property; the excess debt will become a non-priority unsecured debt. Many Chapter 13 repayment plans involve paying back non-priority unsecured debts, but some provide for just partial repayments or a complete discharge of unsecured debt.
The Court’s Loss Mitigation Program
Finally, the Bankruptcy Court for the District of New Jersey offers a Loss Mitigation Program to homeowners who file bankruptcy. The program serves as an online forum where debtors and lenders discuss alternatives to foreclosure. The alternatives include loan modification, loan refinance, and forbearance. The terms of any loss mitigation solution will vary in each case, and not all parties will resolve their mortgage loan issues through the program. However, the Bankruptcy Court Loss Mitigation Program encourages the parties to settle their differences under the supervision of the bankruptcy court.
The Takeaway
Foreclosure is one of the most frightening events a homeowner will face. And, bankruptcy is often a last resort for people with substantial debt. Chapter 13 offers homeowners who want to avoid foreclosure and who have enough income to fund a viable repayment plan an option to save their homes. Indeed, Chapter 13 can be a lifeline for homeowners facing foreclosure. While Chapter 7 bankruptcy provides a way for people to get out of debt, Chapter 13 provides an opportunity to keep your home through long-term repayment of debt.
Chapter 13 bankruptcy is not a quick fix - it’s a complicated process with stringent legal requirements and eligibility standards. If you’re considering using bankruptcy to help keep your home, consult a qualified bankruptcy attorney to be sure you understand the process and whether bankruptcy can help you.
Ernest G. Ianetti, Esq. has over 30 years of professional experience. If you are considering Chapter 13 Bankruptcy, we can help you create a repayment plan. We’ll work with you, the trustee, and your creditors to ensure your Chapter 13 case succeeds. To schedule a FREE Consultation, click here.
Ernest G. Ianetti, Esq., represents clients in Chapter 7, Chapter 13, and Chapter 11 Bankruptcy. Our office is conveniently located in the Rockaway Townesquare Mall complex. We represent clients from Morris County and surrounding areas, including Sussex County, Essex County, Union County, and Passaic County.
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