As discussed in one of our previous blog posts, Chapter 13 Bankruptcy can be a very powerful tool to solve a fairly wide variety of financial problems. One of the most common uses of Chapter 13 is to save a home from foreclosure.
Under federal law, a foreclosure proceeding must stop once the homeowner files a Chapter 13 Bankruptcy as the “automatic stay” prevents the continuation of the foreclosure. Note, however, that the bankruptcy must be filed before the foreclosure or sheriff’s sale. Anyone contemplating saving a home using Chapter 13 should consult with an experienced attorney well before the foreclosure date so that all of the necessary paperwork can be prepared and filed in a timely manner.
More importantly, Chapter 13 allows the homeowner to catch up on the missed payments over a three-to-five-year time period. In Chapter 13, the homeowner continues with regular monthly mortgage payments after the case is filed, and the arrearage as of the time of filing is paid over time by the Chapter 13 Trustee from the monthly payments that the homeowner makes to the Trustee. If successful, the homeowner is current on mortgage payments at the end of the case.
That being said, I would like to offer some cautions and warnings about using Chapter 13 to save a home:
✔ The homeowner must continue with regular monthly payments as per the mortgage note beginning with the month after the Chapter 13 is filed; otherwise, the lender will be entitled to continue with the foreclosure. The bankruptcy laws do not allow for the modification of the regular payment, though the homeowner is free to attempt a loan modification with the lender to reduce the regular payment. Similarly, if the homeowner misses payments to the Chapter 13 Trustee, it is likely that the Court will permit the lender to resume its foreclosure.
✔ The homeowner must make a determination as to whether it makes economic sense to try to save the home. If the homeowner is significantly “under water” on the mortgage, and there is a large delinquency, it may make little sense to try to save the home. It could be quite a number of years before the value of the home exceeds the debt owing against it.
✔ The homeowner must have sufficient income to be able to make the regular monthly mortgage payment, cover basic living expenses, and make a payment to the Chapter 13 Trustee depending on how large the delinquency is. Without sufficient income, the Bankruptcy Court will not confirm a Chapter 13 case.
✔ Anyone filing for Chapter 13 Bankruptcy must normally turn over tax refunds to the Chapter 13 Trustee for at least the first three years of the Plan, and is prohibited by Court order from incurring any new credit during the case without the approval of the Trustee.
✔ Depending on the situation, if income increases at some point during the case, it is likely that monthly payments to the Chapter 13 Trustee will increase.
While Chapter 13 does offer some powerful advantages, it also comes with some drawbacks. Each homeowner must make an individual assessment to determine whether or not a Chapter 13 filing makes sense, both from an economic, and personal, standpoint.
This post is intended to be purely informational in nature, and cannot be considered legal advice. If you have questions related to the use of Chapter 13 to prevent foreclosure, please call our office at (503) 545-1061 (Oregon cases) or (360) 836-4238 (Washington cases) to schedule a free initial consultation.