Your Home In Chapter 13 Bankruptcy
by Attorneys Stephen R. Elias & Kathleen Michon
You can stop foreclosure and save your home in a Chapter 13 bankruptcy.
Chapter 13 bankruptcy provides opportunities for homeowners to delay or prevent foreclosure and pay off back debt on their mortgages. In some cases, homeowners can also eliminate the amount of second or third mortgages. Chapter 13 bankruptcy is particularly helpful to people who are behind in mortgage payments and need time to get current on their payments so they can keep their home indefinitely. (To learn the basics of Chapter 13 bankruptcy, see the Chapter 13 Bankruptcy area of Nolo’s website.)
Let’s look at how Chapter 13 bankruptcy affects foreclosure proceedings, your mortgage obligations, and more.
Saving Your Home
If you are behind on your mortgage payments, and cannot get current, Chapter 13 bankruptcy may be a good way to save your home. In Chapter 13 bankruptcy, you pay all or a portion of your debts over time through a repayment plan. Chapter 13 bankruptcy lets you pay off a mortgage “arrearage” (late, unpaid payments) over the length of the repayment plan – usually three or five years, depending on your income and the time it will take you to meet all the plan’s requirements.
In order for this option to work, you’ll need enough income to at least meet your current mortgage payment and your other basic expenses at the same time you’re paying off the mortgage arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home. (Note: Although Chapter 13 bankruptcy’s provisions can be used to prevent foreclosure in the long run, Chapter 7 bankruptcy provides a temporary relief from foreclosure that can sometimes lead to a long-term solution. To learn if you can use Chapter 7 bankruptcy to save your home, see Nolo’s article Your Home in Chapter 7 Bankruptcy.)
Warning: Before You File
If saving your home is your only goal in filing for Chapter 13 bankruptcy, first explore the many non-bankruptcy options for avoiding foreclosure – such as negotiating with your lender or taking advantage of government “mortgage modification” programs. (To learn more about ways to prevent foreclosure, see Nolo’s Foreclosure area.) You may be able to get the exact same result – keeping your home and dealing with the mortgage arrearage – without filing for bankruptcy.
Eliminating Second and Third Mortgages
As mentioned, Chapter 13 bankruptcy may help you eliminate the payments on your second or third mortgage. That’s because if your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value), you may no longer have any equity with which to secure the later mortgages. If this is the case, the bankruptcy court may “strip off” the second and third mortgages and recategorize them as unsecured debt -which, under Chapter 13 bankruptcy, takes last priority. Unsecured debts are usually not paid in full in Chapter 13 bankruptcy and sometimes do not have to be paid back at all.
Halting or Delaying Foreclosure: The Automatic Stay
When you file a Chapter 13 bankruptcy petition, all foreclosure proceedings must stop (with one exception, discussed below) until your Chapter 13 repayment plan is approved by the court. This is called the “automatic stay.” If your repayment plan includes provisions for paying off your mortgage arrearage, then once the plan is confirmed (approved by the bankruptcy judge) the lender is bound by the plan and cannot continue with the foreclosure, assuming you make your regular mortgage and bankruptcy plan payments.
If your repayment plan does not include provisions to pay off your mortgage arrears, then once the court approves the repayment plan, the lender may continue with foreclosure proceedings. If you don’t want to keep your home as part of the Chapter 13 bankruptcy, filing for bankruptcy will give you a reprieve from foreclosure of at least several months, during which time you can continue to live in your home. In addition, since most bankruptcy judges give debtors several chances at proposing a feasible repayment plan, the confirmation process may take a long time – giving debtors an even longer respite from foreclosure. (However, if it appears that you’ll never propose a feasible repayment plan, the confirmation process can be greatly shortened.)
There is one exception to the automatic stay. If you have filed another bankruptcy petition within the previous two years, and that filing resulted in the automatic stay being lifted at the request of the party seeking a foreclosure, the filing of this Chapter 13 bankruptcy will not halt foreclosure proceedings. This is to prevent people from filing a series of bankruptcy petitions just to stall foreclosure. (To learn more about the automatic stay, see Nolo’s article How Bankruptcy Stops Your Creditors: The Automatic Stay.)
Modification of Certain Mortgages
Chapter 13 bankruptcy allows the bankruptcy court to modify some debts secured by property if the amount you owe is greater than the value of the property. The amount of the debt equal to the value (or equity) of the property remains secured (meaning the collateral can be taken to pay the debt if you don’t make the payments). The remainder of the debt becomes part of your unsecured debt and is treated as a non-priority debt (which means you will pay less, or even none of it, in your repayment plan). This is called a “cramdown.” For example, let’s say your loan is for $300,000 and the property value is only $200,000. If the loan is eligible for a cramdown, $200,000 remains secured by the property and the remaining $100,000 is added to your unsecured debt.
For the most part, you cannot cram down a mortgage on your residence. However, cramdowns are allowed if:
- the mortgage is for a multiunit building
- the loan is for other buildings or property not part of your residence (like a farm)
- the loan is for a mobile home that is considered to be personal property, or
- the loan is not secured solely by your residence (for example, both your residence and a business asset secure the loan).
If one of these exceptions applies, the court may cram down the loan, but you will have to pay off the entire crammed-down loan through your Chapter 13 repayment plan. For this reason, even if you meet one of the above exceptions, mortgage cramdowns rarely make sense unless you will have the capacity to make a balloon payment at the end of your plan.
For More Information
To learn more about Chapter 13 bankruptcy and how it can help you avoid foreclosure, get Chapter 13 Bankruptcy: Keep Your Property & Repay Your Debts Over Time by Robin Leonard and Stephen R. Elias (Nolo).
If you are trying to save your home and are in jeopardy of foreclosure, get The Foreclosure Survival Guide by Stephen R. Elias (Nolo).
For help on choosing a good bankruptcy lawyer, go straight to Nolo’s Lawyer Directory for a list of bankruptcy attorneys in your geographical area.