A Chapter 13 bankruptcy offers individuals with an income certain advantages over Chapter 7. One of the most significant advantages of Chapter 13 over Chapter 7 is the opportunity to save one’s home from foreclosure. To make Chapter 13 work, you must have enough income to not only meet your current mortgage payment, but also your basic living expenses and an additional sum that represents a fraction of past due payments you owe the lender.
What is the effect of Chapter 13 on a foreclosure?
The foreclosure process usually starts when a homeowner falls behind on a few mortgage payments. The lender starts foreclosure proceedings, notifying the homeowner that it will sell the home at an auction or foreclosure sale in order to get payment for the loan. Some debtors are able to negotiate a loan modification with their lender, but many are denied. If you are denied and the lender plans to foreclose, Chapter 13 bankruptcy may be one of the best options you have to stop your foreclosure.
By filing under Chapter 13, individuals who are delinquent with their mortgage payments can temporarily halt the foreclosure proceedings, so long as the foreclosure sale hasn’t already taken place. However, these individuals must (1) remain current with their future mortgage payments as part of their Chapter 13 matter and (2) be able to cure their delinquent mortgage payments over the term of their Chapter 13 case, which will last anywhere from thirty six (36) months to sixty (60) months.
A home may be lost if the foreclosure sale is completed under state law before the petition is filed. As such, timing is crucial. Similarly, an individual may lose the home for failure to make the regular mortgage payments that still come due after the individual files for Chapter 13 bankruptcy.
How Do You Handle Foreclosure in a Debt Repayment Plan?
To “cure the arrearage,” the debt repayment plan must divide the past due amount owed by the number of set payments to be paid over a set period, usually between three to five years. A Chapter 13 plan allows you to pay the trustee a monthly payment. Ten percent of each payment goes to the trustee and the rest goes to creditors such as your mortgage lender.
Before the meeting of creditors with the chapter 13 trustee, you must submit your paystubs for the prior six months and, if you are self-employed, a copy of your last five tax returns to demonstrate your monthly income, as well as documents showing income from a rental property, child support, social security, and disability. You may also need to submit documents showing the value of your home, such as a tax assessment or appraisal, and proof that it is insured.
Thirty days after your Chapter 13 case is filed, you must begin making the payments which you proposed in your plan as well as the usual monthly mortgage payments for any home you plan to keep. You can also do so for second and third homes you own. Assuming you do make all the required monthly payments for the duration of your case up to the end of plan period, you will have avoided foreclosure and will be able keep your home(s), as you will no longer be delinquent with your mortgage payments since your previously missing mortgage payments will already have been paid back to your mortgage lender via the Chapter 13 case you just completed.
Generally, once you miss several monthly plan payments, the lender will ask the bankruptcy court for permission to foreclosure on your home despite the fact that your Chapter 13 is still pending. At that point, you must bring your post petition mortgage payments (those mortgage payments which you missed after you filed your Chapter 13) current in order to avoid having the lender proceed with a foreclosure. However, most lenders will allow you up to six months to cure your missing post petition mortgage payments. And that makes sense since mortgage lenders are not in the business of foreclosing. They prefer to make their money from the monthly mortgage payments you pay them each and every month. You must also file an objection and provide a good reason for failing to make the payments to keep the bank from foreclosing on the house.
In some cases, homeowners can also eliminate the amount of their second or third mortgages as well. This becomes possible through a process called lien-stripping if your home drops in value and the first mortgage is under-secured by the entire value of the home. Practicing bankruptcy law since 1997, the Los Angeles bankruptcy attorney Devin Sawdayi can help you save your home. Contact our firm at 310-475-9399 or via the online form.
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