Your Home and Mortgage in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a great tool to help homeowners avoid foreclosure in certain circumstances. If a debtor can stick to his/her Chapter 13 bankruptcy repayment plan, s/he may be able to enjoy a number of benefits.  A Chapter 13 filing enables the debtor to get his/her mortgage current and at the same time, open the door to real and meaningful negotiation with the creditor/holder of the mortgage. The negotiation with the mortgage credit servicer may grant an extension or relaxation in payments with a wide variety of fees and costs. If the debtor files a Chapter 13 bankruptcy, s/he can challenge the validity of such unreasonable fees and costs on a variety of grounds.

A Chapter 13 bankruptcy works to maintain the debtor’s house, provided that s/he has sufficient income to make both his/her recent payments and also pay back a small part associated with his/her mortgage arrears each month (plus costs and fees). Moreover, the debtor should show in the repayment plan that s/he will make plan payments along with the current payments and other reasonable and necessary monthly expenses.

Other benefits include:

  • Make the Mortgage More Affordable by Reduction of Other Debts: The debtor will have better plan and resources to dispose all of his/her disposable income to manage secured debts along with the unsecured debts, and other debts such as mortgage arrears or recent back taxes within three to five year period. Generally, all unsecured debts are settled before the expiry of the repayment plan. However, certain debts such as child support or student loans survive over Chapter 13 bankruptcy.
  • Request the Court to Reduce or Cramdown Certain Secured Debts: Chapter 13 bankruptcy court can cramdown or reduce specific secured debts towards the market value of the collateral. The bankruptcy court can also limit the interest rates of the secured debt. The reduction in payments on other secured debts enable the debtor to pool more money towards his/her mortgage debts.
  • Dispute the Foreclosure: The debtor can challenge the legitimacy of the proposed foreclosure by the creditors in the bankruptcy court. Moreover, the debtor can challenge any kind of claims for costs and fees linked with the foreclosure procedure which might be included with the actual overlooked repayments.
  • Convert a Second or Third Mortgage Into an Unsecured Debt: Generally, the debtor’s mortgage may be encumbered with a second or even a third mortgage. If the debtor makes any default in the first mortgage, it automatically affects the second and third mortgages. Chapter 13 bankruptcy courts can remove or strip off liens on debtor’s real property created by second and third mortgages, by providing them as totally unsecured debts.

Inside Your Home and Mortgage in Chapter 13 Bankruptcy