I'm behind on secured debt payments. Can Chapter 13 bankruptcy help?
You can catch up on secured debt arrears through a Chapter 13 repayment plan. Here's how it works.
If you are behind on secured debt payments (such as your mortgage or car loan), Chapter 13 bankruptcy can help you cure your default or pay off your loan through a repayment plan. Read on to learn more about how Chapter 13 can help you catch up on your secured debt payments.
(Learn more about Chapter 13 and how it works in our Chapter 13 Bankruptcy topic area.)
What Happens If You Fall Behind on Secured Debt Payments?
A debt is considered secured if the creditor has a lien on a piece of property as collateral for the loan. The most common examples of secured debt are your mortgage and car loan. If you fall behind on your secured debt payments, your lender can foreclose on your house or repossess your car (or other collateral) to satisfy its loan. (To learn more, see What Is a Secured Debt?)
However, filing for Chapter 13 bankruptcy can stop the lender from taking your property and allow you to catch up on your missed payments.
How Can Chapter 13 Help You Catch Up on Secured Debt Payments?
When you file for Chapter 13 bankruptcy, the automatic stay protects you against creditors foreclosing on or repossessing your property. Chapter 13 is also called a reorganization bankruptcy because it allows you to pay back some or all of your debts through a repayment plan. A Chapter 13 plan typically lasts three to five years so it provides you a long period of time to cure your default. (To learn more, see the articles in The Chapter 13 Repayment Plan.)
If you are behind on your mortgage, you can catch up on your arrears (missed payments) through your plan. Similarly, if you are behind on other debts secured by personal property such as your car loan, you can pay off the entire debt in your Chapter 13 (discussed below).
Curing Your Mortgage Default Through Your Chapter 13 Plan
Through your Chapter 13 plan, you can catch up on your mortgage arrears under the protection of the automatic stay. However, your repayment plan is designed to pay your pre-bankruptcy arrears so you are still required to make your regular mortgage payments as they come due during your Chapter 13. If you fail to make your mortgage payments, your lender can ask the court to lift the automatic stay to resume foreclosure.
As a result, you are protected from foreclosure as long as you continue to make your plan and ongoing mortgage payments. If you make all of your payments, your mortgage default will be cured when you complete your plan. (For details on what happens to your home in Chapter 13, how to avoid foreclosure, and more, see Your Home in Chapter 13 Bankruptcy.)
Example. Jason is behind $12,000 on his mortgage payments. As a result, the bank is about to foreclose on his house. If Jason files for Chapter 13 bankruptcy, he can stop the foreclosure process and catch up on his arrears by paying the bank $200 a month through his repayment plan (assuming a five year plan and zero interest).
Paying Off Debts Secured By Personal Property in Your Chapter 13
Most debts secured by personal property, such as your car loan, can be completely paid off through your Chapter 13 plan. As a result, if you are behind on your car loan, Chapter 13 bankruptcy allows you to pay off the entire debt (not just the arrears) as part of your repayment plan. Since you are protected by the automatic stay, your lender is prohibited from repossessing your car as long as you continue to make timely plan payments to the bankruptcy trustee.
Depending on the amount of your loan, you may also be able to lower your monthly obligation by stretching your payments over a five-year bankruptcy plan. In addition, if you meet certain requirements, you may even be able to reduce the balance of your loan to the fair market value of the car or other property securing it. This is referred to as a Chapter 13 cramdown.
(For details on catching up on car loan arrears, cramming down your car loan, and more, see Your Car in Chapter 13 Bankruptcy.)