This article is for informational purposes only. Ascend does not provide legal advice, and are not attorneys. If you'd like to speak with a bankruptcy attorney that serves your city, you can speak with one in a free consultation.
Let’s discuss filing Chapter 13 and foreclosures. Chapter 13 cases are repayment plans. When you file Chapter 13
, you must submit a proposed repayment plan. The plan is based on your financial situation at the time you file the case. The plan payment is based on several factors including:
- Your income and expenses;
- Disposable income;
- Means Test;
- Types and amounts of debt;
- Excess equity in the property; and,
- Recent financial transactions.
If you are curious about what your Chapter 13 plan payment might be, you can try our Chapter 13 payment calculator below. A significant part of your Chapter 13 plan payment may be based on your mortgage and home value. Let’s take a closer look.
How Can Chapter 13 Bankruptcy Stop Foreclosure to Save My Home?
When you file for bankruptcy relief, the automatic stay provisions of the Bankruptcy Code protect your property from creditors. Creditors, including mortgage companies and banks, cannot take any further action to collect the debt. The mortgage company must stop all attempts to collect past payments, including stopping foreclosure actions.
Filing a Chapter 13 bankruptcy plan can save your home from foreclosure. Through the bankruptcy repayment plan, you can catch up on the past due mortgage payments over three to five years. As long as you make your Chapter 13 plan payments and resume making your regular mortgage payments, you can keep your home in Chapter 13.
Your Chapter 13 case can also lower your car payments and relieve other debt obligations so you can afford your mortgage payments. It will not lower your mortgage payment or reduce the amount you owe to your mortgage company.
How Do I Catch Up On My Mortgage Arrears in Chapter 13 bankruptcy?
Most individuals who want to stop foreclosure and keep their home file for bankruptcy relief under Chapter 13. Chapter 13 is designed to allow homeowners to catch up on mortgage arrearage through an affordable monthly plan.
Your past-due mortgage payments are included in your Chapter 13 plan. Most Chapter 13 plans are calculated based on a 60-month plan. Some individuals could qualify for a three-year plan, but most Chapter 13 plans are for five years. By spreading out the mortgage arrearage over five years, you may be able to afford to keep your home in bankruptcy
Keep in mind that you must resume making your regular monthly mortgage payments outside of the Chapter 13 plan. If you fall behind on your mortgage payments again, the mortgage lender could petition the bankruptcy court to modify the automatic stay.
Modifying the automatic stay means that the mortgage lender can resume foreclosure even though you are in Chapter 13. Therefore, it is very important that you make your mortgage payments on time moving forward.
What Happens to My Second Mortgage in Chapter 13 bankruptcy?
If you have a second or third mortgage, you can also use the Chapter 13 plan to catch up on past due payments on those loans. However, just like your first mortgage, you must resume payments to these mortgage lenders outside of the Chapter 13 plan.
In some cases, you could get rid of a second mortgage for pennies on the dollar. If your home is worth less than you owe to your first mortgage lender, you can file a motion with the court to value the second mortgage at zero. However, your home cannot be worth even $1 more than you owe on the first mortgage to value the second mortgage at zero.
If the second mortgage is valued at zero, the entire debt becomes an unsecured debt. The second mortgage lender receives the same percentage as other unsecured debts. Therefore, if your plan pays 10 percent to unsecured creditors, your second mortgage lender receives 10 cents on the dollar. When you complete your Chapter 13 plan, the second mortgage lien is canceled.
What Happens to My Equity in a Chapter 13 Foreclosure Case If The Equity Is More Than The Homestead Exemption?
Another issue that could become a problem in a Chapter 13 foreclosure is net equity in your home. As we discussed above, you can exempt a certain amount of equity in your home.
Don’t panic. The homestead exemption in many states is much higher than the federal homestead exemption. You can check online or talk to a bankruptcy lawyer to determine how much equity you can protect in your home if you file a Chapter 13 case.
You Can Keep Your Home in Chapter 13
In a Chapter 13 case, the Chapter 13 trustee does not sell property that has non-exempt equity. However, the non-exempt equity must be included in your Chapter 13 plan. Your unsecured creditors must receive equal to or more than they would receive in a Chapter 7 liquidation if you have non-exempt equity. As long as you can afford your Chapter 13 payments, you keep your home in Chapter 13. The equity in the home remains in the home.
We mentioned above that we have a blog that discusses homestead exemptions
in great detail. We will briefly discuss how that impacts your plan payment in a Chapter 13 foreclosure by using our example from above.
Net Equity in a Home and Your Chapter 13 Plan Payment
In our example above, the net equity in your home totals $4,435 after deducting the mortgage payoff, exemptions, commissions, and costs. Therefore, your unsecured creditors must receive a minimum of $4,435 through your Chapter 13 plan because that is what they would receive if you filed under Chapter 7.
That amount equals about $74 per month over a 60-month Chapter 13 plan. If your proposed Chapter 13 plan pays unsecured creditors $100 per month, then the equity in your home does not impact your plan payment.
However, if you have substantial equity in your home above the allowed exemption, your plan payment could change. Let’s assume that you have $100,000 in net equity in your home. Over a 60-month Chapter 13 plan, that totals $1,667 per month. For some debtors, that payment would be too much. In most cases, this situation does not arise. Most debtors do not have substantial equity above the allowed homestead exemption.
Keep in mind that the unsecured creditors cannot receive more than you owe on the accounts. Therefore, if you owe $50,000 in unsecured debts, your unsecured debt payment would be $834 per month, regardless of how much equity you have in your home.
Individuals who have significant equity in the home can benefit from discussing their situation with a bankruptcy lawyer. A bankruptcy lawyer analyzes your entire financial situation, explains all your options, and discusses the pros and cons of each option.
Should I File Chapter 13 Bankruptcy to Stop Foreclosure?
Filing a Chapter 13 bankruptcy can help stop a foreclosure, but should you file a Chapter 13 bankruptcy? That is ultimately your decision. A couple of things you can do today:
1) Take the Chapter 13 Monthly Payment Plan Affordability Calculator to estimate whether Chapter 13 will be affordable for you.