How Chapter 13 Bankruptcy Prevents a Debtor From Losing His Home to Foreclosure
If a debtor falls behind on his monthly mortgage payments and is facing foreclosure proceedings, a Chapter 13 Bankruptcy will stop the foreclosure and give the debtor the opportunity to save his house.
There are two criteria that the debtor has to meet in order for a Chapter 13 to be successful. First, the circumstances that caused the debtor to fall behind on his mortgage payments must no longer exist. For example, if the debtor fell behind due to a job loss, but is now working again and can afford to make the Plan payment required to save his home from foreclosure, then such a Plan should work. If, however, the debtor fell behind due to job loss, and is still not working, then the Chapter 13 will fail, as the debtor would not have the income required to make the monthly Plan payment.
Second, the Debtor has to file his Chapter 13 prior to the date and time of the foreclosure sale. If the Bankruptcy is filed after the date and time of the foreclosure sale, then the property is lost and all the Debtor has left are his “equity of redemption” rights. In such a scenario, the debtor can either try to sell the property for more than what he owed on it at foreclosure, thereby pocketing the difference, or he can live in the house for free for six months after the foreclosure sale before he has to vacate. Either way, the property is lost.
If the debtor filed his Chapter 13 prior to the foreclose sale, he can now catch up the mortgage arrearage over the life of a Chapter 13 Plan that can go up to 60 months. The concept is very simple. The mortgage arrearage, (which should include in it mortgage attorney fees and costs), is divided by the length of the proposed bankruptcy Plan. If the debtor files a 36 month Plan, it is divided by 36. If the debtor files a 60 month Plan, it is divided by 60 months. Assuming a 60 month Plan, the one sixtieth increment (arrearage amount divided by 60) is added on to the debtor’s current monthly mortgage payment. So each month, the debtor pays through his Bankruptcy Plan his current monthly mortgage payment PLUS one sixtieth of the mortgage arrearage such that on month 60, when his plan is over, the total arrearage is caught up. At that point, the debtor resumes making his NOW CURRENT monthly mortgage payment directly to the mortgage company. He can do so because the arrearage is caught up.
In a Chapter 13, the debtor’s monthly mortgage payment does not reduce, and it does not remain the same. It actually goes up by the whatever monthly increment it takes to catch up the mortgage arrearage over the life of the Plan. Once the arrearage is caught up, the mortgage payment drops back down to whatever the pre-bankruptcy mortgage payment was.
It is paramount that the bankruptcy be filed PRIOR to the date and time of the scheduled foreclosure sale, as otherwise the property is lost. It is also important that the debtor know that the mortgage arrearage will include costs and fees incurred by the mortgage company in prosecuting the foreclosure proceeding, so the sooner the Chapter 13 is filed, the better, as there will be less fees and costs incurred by the mortgage company for the debtor to pay back.
If you are facing foreclosure, please contact the Law Offices Of Joseph L. Grima & Associates P.C. at (800) 603-3333 so that we can explain in greater detail how Chapter 13 Bankruptcy can prevent you from losing your home.