How Do I Save My Home? Using Bankruptcy Protection (Chapter 13)

Bankruptcy protection is often utilized to stop foreclosure and provide the debtor an opportunity to restructure mortgage arrears on affordable repayment terms.

When debtors fall behind on their mortgage, the bank usually insists upon upfront repayment of ALL past due mortgage arrears, or repayment over a very brief window of time – two to three months. This financial predicament is usually impossible for the debtor who wants to save its home.

The bankruptcy alternative is a Chapter 13 bankruptcy. Chapter 13 of the United States Bankruptcy Code enables the debtor opportunity to restructure payment of past due mortgage arrears over a three (3) to five (5) year term. This makes catching up past due mortgage payments affordable for the debtor.

Chapter 13 Bankruptcy is commonly known as a “wage earners” plan. The debtor is required to prove to the Bankruptcy Court that it has sufficient regularly recurring income or steady wages to manage payment of a modest household budget and adequate surplus income enabling the debtor to pay back the mortgage arrears over a term that does not exceed five (5) years.

In some instances, the mortgage arrears must be paid back with interest. This, however, depends upon the provisions set forth in the loan documents that govern the debtor’s loan.

Chapter 13 also enables debtors to restructure escrow advances made by the bank. If the debtor’s bank advanced payment towards real estate taxes, property insurance, etc., those advances can also be repaid over a Chapter 13 plan term, not to exceed five (5) years.

As an example, let’s say the debtor’s mortgage payment is $1,200.00 per month and the debtor has fallen 24 months behind on its mortgage payment, and mortgage arrears total $28,800. The debtor’s bank commenced a foreclosure action and the bank is ready to auction off the property.

Upon filing a Chapter 13 bankruptcy, all debt collection activity of creditors must cease, including the bank’s mortgage foreclosure.

The debtor now can formulate a plan to repay the mortgage arrears on a payment plan that works within the debtor’s budget.

Upon entering Chapter 13 Bankruptcy, the debtor must remain current on all of its monthly bills arising AFTER the date of its Chapter 13 filing. So, the debtor’s income must be sufficient to afford payment of its ordinary living expenses (mortgage, utilities, food, insurances, auto payment, medical expenses, etc.) and, in addition, there must be sufficient surplus income to pay the Chapter 13 plan payment i.e. the mortgage arrears. That means the debtor must possess surplus income of at least $480.00 per month above and beyond its ordinary living expenses to pay back the mortgage arrears over the next five (5) years. If this is affordable, the debtor can save its home under a Chapter 13 plan.

The Bankruptcy Court will also require the debtor to make some repayment towards unsecured creditors. Most Courts require debtor repay unsecured creditors at least 20% of outstanding unsecured claims. So in addition to the repayment of mortgage arrears, the debtor must be able to afford payment of a dividend to unsecured creditors. In our example, let’s assume the debtor has $20,000 in credit card debt. The Bankruptcy Court would expect our debtor to repay the unsecured credit card claims at least $2,000.00 over a term not exceeding five (5) years. So, the debtor’s income must be sufficient to pay its ordinary living expenses, mortgage arrears at the rate of $480.00 per month plus a dividend to general unsecured creditors of $33.33 per month.

So long as the debtor can afford to pay its ordinary living expenses, and the Chapter 13 plan payment, it will be able to save its house under the protections afforded under Chapter 13 of the United States Bankruptcy Code.