By Walter Metzen
When Facing Foreclosure, Consider Chapter 13 Bankruptcy
A Chapter 13 bankruptcy filing is among the most reliable means of stopping a home foreclosure process available.
With the exception of simply paying an arrearage off in full, a near impossibility for most homeowners encountering financial difficulty, a Chapter 13 bankruptcy is the single most effective way to stop a foreclosure under U.S. law.
A Chapter 13 bankruptcy filing will stop a foreclosure process dead in its tracks—so long as it is filed prior to the foreclosure auction of the property.
It does not need to be negotiated with your mortgage servicer. It does not require your creditors’ “permission” to file.
You are simply entitled to the debt relief offered by Chapter 13 by virtue of living in the United States.
But what is it, and how does it work to cure a mortgage payment deficiency?
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is known as a “reorganization” bankruptcy.
It is a process in which you repay the portion of your debt that you can afford to pay with whatever “net” monthly income remains from your take-home pay after reasonable household expenses are deducted.
Each month, while in Chapter 13, you make a payment to the Chapter 13 Trustee assigned to your case by the US Bankruptcy Court equivalent to that “net” income amount.
You do not pay your creditors directly while in Chapter 13. They are “stayed” from engaging in any collections activity while you are in the bankruptcy process by a “master” injunction under Federal Bankruptcy law known as the Automatic Stay Against Collections.
Instead, you make that monthly Chapter 13 Plan payment to the Chapter 13 Trustee, who then disburses the funds out to your creditors in a priority order of payment mandated by the US Bankruptcy Code.
Importantly, that priority order allows you to pay secured mortgage payments and mortgage arrearage balances before unsecured debts such as credit card balances and medical debt.
Outside of bankruptcy, there is no such priority order: all creditors insist on being paid immediately, every month, regardless of what you owe any other type of creditor.
In Chapter 13, that is not the case.
Secured debts simply are paid prior to unsecured debts period, whether your creditors like it or not.
This means that, in Chapter 13, you have the ability to essentially “ignore” unsecured debts while bringing current your past-due mortgage payments.
Unsecured creditors will only receive from the Chapter 13 Trustee whatever is left over from your monthly Chapter 13 Plan payments after secured and other priority debts are fully paid.
Whatever unsecured creditors are not paid by the Chapter 13 Trustee that remains owing on paper is then, at the end of the process, totally discharged as it would be in a Chapter 7 bankruptcy.
So long as you make every required monthly Plan payment and follow the other rules of the Chapter 13 road, you will save your home from foreclosure with little to no discussion with your mortgage servicer or its foreclosure lawyers required.
Who Can File Chapter 13 Bankruptcy?
Who is eligible to file Chapter 13 bankruptcy?
Anyone with sufficient income to fund their particular Chapter 13 Plan.
What does that mean?
The “cost” of every Chapter 13 is specific to the circumstances of the individual filing it. If your Chapter 13 case involves only unsecured creditors with no minimum amount that they must be paid as a pool, you will need to make only a very minimal Plan payment.
However, if your Chapter 13 involves a priority or secured debt that is significant in amount, it will need to be fully repaid within the 60-month maximum length of the Chapter 13 process.
Thus, you will need to have sufficient income to make a monthly Plan payment in an amount that will accomplish that.
If you do not have that level of income, the Chapter 13 process may be unavailable to you—but this is always something to discuss with an experienced bankruptcy attorney.
Aside from that practical consideration, the only other legal eligibility requirement is that you not have too much debt.
The Bankruptcy Code imposes a debt limit upon debtors in the Chapter 13 process. However, the amounts are high enough that this eligibility requirement affects only a small minority of debtors.
Your bankruptcy lawyer will advise you if you approach these limits.
Otherwise, if you obtained a discharge in a prior Chapter 7 or Chapter 13 bankruptcy with a filing date within 4 years of the proposed filing date of a subsequent Chapter 13 proceeding, you may not be eligible for a bankruptcy discharge in the new Chapter 13.
However, you can still file one to impose the Automatic Stay upon your creditors and to cure a mortgage arrearage.
The unpaid balances owed to any unsecured creditors at the end of the process simply won’t be discharged and will be collectible (plus accrued interest) when you exit the process.
Chapter 13 Mortgage Arrearage Cure: A Case-Study
So how exactly is a mortgage arrearage cured in Chapter 13? Let’s walk through the process by way of a short case-study.
Han and Leia are 9 months delinquent in their mortgage payments after Han was laid off for 8 months from his job as a welder.
Their mortgage payment is $1,200 per month. With late fees, their current total arrearage is $14,000.
Although Han is back to work, with some overtime available, they have just been scraping by on Leia’s salary as a nursing assistant.
Their mortgage servicer has referred their file to its foreclosure attorneys, who have served them with a notice of foreclosure sale. This “sheriff’s sale” is scheduled for 30 days away.
Desperate, they seek the advice of an experienced Metro Detroit bankruptcy attorney, who advises them that they can stop the foreclosure and cure the arrearage with a Chapter 13—but only if they file the case before the sheriff’s sale.
Moving quickly, they retain the attorney and provide him with all of the documentation required to draft and file a bankruptcy petition and Chapter 13 Plan.
The Chapter 13 Plan requires that, each month, the Chapter 13 Trustee will pay their ongoing, regular monthly mortgage payment of $1200 as a high priority secured debt.
Their 60-month Plan also stipulates that the Trustee will pay off the existing mortgage arrearage of $14,000 at a rate of $233.33 per month for each of those 60 months.
Interest is not required to be paid on mortgage arrearages in Chapter 13. Neither can the creditor continue to assess late fees.
Thus, the filing of the Chapter 13 “freezes” the amount due at that $14,000 amount. This is good! No more “snowballing” of the debt!
Han and Leia have about $30,000 in credit card balances, as well as a few doctors’ bills, totaling $33,000 in unsecured debt.
They don’t owe any taxes or other “high priority” debt.
Thus, their monthly Chapter 13 Plan payment must be sufficient to pay only: (1) the ongoing $1200 mortgage payment; (2) the $233.33 mortgage arrearage payment; (3) approximately $200 to cover attorney’s fees and Trustee’s fees; and (4) a few cents to throw to the unsecured creditors.
Their required monthly Plan payment totals, therefore, $1640.00, of which they would have been paying $1200 to their mortgage servicer anyway.
The out-of-pocket cost of saving their home and eliminating their credit card debt? $440 per month for 60 months.
Han and Leia realize immediately that they could never have negotiated a “debt settlement” of this sort—which also carries no tax penalty as “debt settlement” does outside of bankruptcy!—on their own.
Over 5 years, they make every payment and successfully follow all of the other Chapter 13 “rules,” and they exit the Chapter 13 process current with their mortgage payments and free of all other debt.
Saving Your Home from Foreclosure with Chapter 13 Bankruptcy: The Bottom Line
The bottom line is that the Chapter 13 bankruptcy process should not only not be overlooked when facing home foreclosure, it should very likely be the first option to consider.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has assisted thousands of Detroit area clients with Chapter 7 and Chapter 13 bankruptcy for over 28 years.
If you are facing foreclosure, you cannot wait to consult an experienced bankruptcy attorney.
Contact us now to schedule your free consultation.