One of the benefits of Chapter 13 bankruptcy is the ability to catch up on back mortgage payments and keep your home. However, during your Chapter 13 case, you must make timely mortgage payments; otherwise, your lender can obtain court permission to foreclose on your house. In this article, you'll learn what will happen if you don't pay your mortgage while in Chapter 13 bankruptcy.
(For more on what happens to your home, primary mortgage, and junior mortgages in Chapter 13, see Your Home and Mortgage in Chapter 13 Bankruptcy.)
If you have a home loan, your lender typically has a lien (a type of ownership interest) on your house. The lien allows the lender to sell your house at a foreclosure sale to satisfy the loan if you stop paying on your mortgage.
Once you file a Chapter 13 bankruptcy case, an order called the automatic stay is put in place that prohibits creditors from engaging in collection activities. The automatic stay prevents your lender from foreclosing on your house without obtaining court permission first.
However, if you want to keep your house while in Chapter 13, you must continue making your ongoing mortgage payments as they come due, either by making your regular payments directly to your lender outside of bankruptcy, or to the bankruptcy trustee as part of your repayment plan.
If you are behind on your mortgage before filing your Chapter 13, you can pay off the arrears through your repayment plan. After the court confirms (approves) your repayment plan, your lender can't foreclose on your house for pre-bankruptcy mortgage arrears as long as you're paying them off through your plan. (Learn more about how bankruptcy can help with foreclosure.)
If at any time during your Chapter 13 case, you fail to pay your monthly mortgage obligation (either inside or outside the plan), your lender can seek court permission to foreclose on your house.
(Read Options if You Can't Make Your Chapter 13 Plan Payments if you find yourself falling behind on your repayment plan.)
A lender who wants to move forward with foreclosure starts the process by filing a motion for relief from the automatic stay with the court. If the lender wins the motion, it will be able to begin—or resume—the process of obtaining the home, selling it at auction, and applying the proceeds to the mortgage loan.
After the lender files the motion for relief, you'll have approximately two weeks to oppose it (check the dates supplied on the paperwork or speak with a bankruptcy attorney to verify the timing). If you don't oppose the motion, the court will usually grant the request and lift the stay for the mortgage lender only. It will remain in effect for your other creditors. Your lender will be free to initiate or continue foreclosure proceedings.
If you oppose the lender's motion for relief, you'll have the opportunity to appear a hearing in front of the judge. At the hearing, the judge will listen to argument before granting or denying the lender's motion.
If you convince the judge that you can catch up on the missed payments, the judge will usually give you time to do so (this is referred to as an adequate protection order). If you're successful, the stay will remain in effect. However, if you fail to comply with the adequate protection order, the stay will likely be lifted without further hearing.
(To learn more, see When a Creditor Tries to Lift (Remove) the Automatic Stay.)