Keep Your House With Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a great tool for avoiding foreclosure. If you can stick to your Chapter 13 repayment plan, you may be able to:

  • repay missed mortgage payments (your mortgage arrears) over the life of the repayment plan, typically three to five years
  • pay a fraction (or sometimes, nothing) of your unsecured debts during the plan period and probably eliminate these other debts entirely when you complete your plan, freeing up money to pay your mortgage
  • ask the court to reduce (“cram down”) certain secured debts to the value of the collateral (for instance, reduce your $20,000 car note to the actual value of the car, say $12,000, reducing your monthly payments)
  • contest the legality of the proposed foreclosure in the bankruptcy court
  • contest any claims for costs and fees that are added to the missed payments you’ll repay as part of your plan (these costs are commonly made erroneously), and
  • get rid of (strip off) liens on your home created by second and third mortgages, as long as they are wholly unsecured by your home (that is, if your home were sold the proceeds would be insufficient to pay back any portion of the lien).

Each of these Chapter 13 benefits are described in detail below.

Repay Your Mortgage Arrears Over Time

In many ways, your Chapter 13 bankruptcy repayment plan is like a plan you might negotiate with the mortgage servicer. Either way, you have an opportunity to get your mortgage current over time. Of course, if the only reason you are filing Chapter 13 is to get time to get your mortgage current, and you could get a similar deal from the servicer, you’ll be better off not filing for bankruptcy, at least as far as your credit score is concerned.

EXAMPLE: Freddie owes $3,600 in missed mortgage payments. He receives a notice of default that gives him a month to pay up or lose his house. His mortgage servicer refuses to work with him because of a previous notice of default—the lender doesn’t think he’s a good credit risk.

Freddie had fallen behind on his mortgage because he was laid off, but now he’s working again. If he files for Chapter 13 bankruptcy and gives up one of the cars he’s making payments on, he’ll be able to afford a repayment plan, under which he will stay current on his mortgage and also make up the arrears over three years. He proposes to pay down the arrears at the rate of $120 a month: $100 for the debt plus $20 a month for the trustee’s fee.

Part of the problem in workouts with a mortgage servicer is that servicers typically add on a wide variety of fees and costs, which make it difficult for the homeowner to reinstate the mortgage. In Chapter 13 bankruptcy, you can challenge the validity of these fees and costs on a variety of grounds. â

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