Chapter 13 Bankruptcy –Save Your Home
For homeowners struggling with underwater mortgages, loss of income, divorce and other factors that make it harder to pay their monthly mortgage payments, bankruptcy law offers a refuge. The most commonly understood and used form of bankruptcy is known as a Chapter 7. In a chapter 7 the eligible homeowner is discharged of all personal responsibility to pay back the mortgage. This is a powerful outcome because a homeowner is now free to walk away with repercussions from the mortgage lender or the IRS in terms of debt forgiveness income. As part of my practice, it is often the case the homeowners who file chapter 7 want to keep their homes and, in fact, some of them are successful in obtaining a loan modification during or after the bankruptcy.
Homeowners can also file a Chapter 13 bankruptcy. Chapter 13 bankruptcy is a repayment plan where the homeowner proposes to pay his or her creditors some or all of the outstanding balances. As a result, it is also referred to as an income earners bankruptcy because you are required to show the ability to pay according to the proposed plan. Most homeowners file chapter 13 to catch up on mortgage arrears and stop a foreclosure sale.
Read more about the overall Chapter 13 process.
As with the filing of a chapter 7, once your chapter 13 is filed the automatic stay goes into effect. The automatic stay prohibit all collection activity from your creditors, including but not limited to, garnishments and foreclosure sales. Therefore, once your case is filed the foreclosure sale cannot occur. It is pretty powerful. I have stopped foreclosure sales with minutes to spare, not ideal, but you help your client where you find them and some wait until the last possible minute.
Next comes the real tough job in a chapter 13: getting a confirmed plan. A homeowner trying to save his or her home must the arrears within 3 or 5 years while maintaining the current monthly mortgage payments. The option to spread the arrears payment over that time makes it more affordable than the bank’s demand that one cure the default by paying a lump sum. It is a tall order and requires total dedication.
Aside from giving you time to pay off arrears, a chapter 13 will help some homeowners get rid of second and third mortgages on their homes. This can be a powerful added benefit! This requires that the home be valued less than the first mortgage and often requires a motion to be approved by the court. Nonetheless, if granted and the homeowner receives a discharge then that second or third mortgage is eliminated. For more on lien avoidance go here.
In addition, as mentioned, you may also be able to discharge a second or third mortgage on your home. If you home is worth less than you owe on a first mortgage in fair-market value terms, your second mortgage is not actually secured by the value of the collateral securing that loan—the house. That second lien may thus be “re-classified” as unsecured debt and stripped off, paid in part and the discharge balanced entirely by the Chapter 13, the lien on record with your county required to be removed by the lien-holding bank after the Chapter 13 discharge of debt is issued by the court.
I have worked with homeowners to file Chapter 13 bankruptcy cases and have successfully saved homes from foreclosure. If your mortgage lender is threatening foreclosure and you have a steady stream of income contact me immediately to schedule a consultation.