You can stop paying your mortgage in Chapter 13 bankruptcy, but you'll lose your house. One of the benefits of Chapter 13 bankruptcy is the ability to catch up on back mortgage payments and keep your home. However, if you don't make timely mortgage payments during your Chapter 13 case, your lender can take steps to foreclose on your house.
In this article, you'll find answers to common Chapter 13 mortgage questions, including:
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Actually, no, you don't. If you can't afford the payment or don't want the home anymore, you can give the home back to the lender. Surrendering it will relieve you of your responsibility to make the monthly payment.
If you let the home go, the mortgage debt will get lumped with other low-priority obligations that must share your "disposable income," the amount remaining after you pay monthly expenses and other required debts. These creditors often receive pennies on the dollar.
When you complete the Chapter 13 plan, the balance will be "discharged" or erased with other qualifying balances. However, if you want to keep your home in Chapter 13, you'll have to pay what you owe.
You'll need to do three things to keep your financed house in Chapter 13:
Anytime you stop paying mortgage payments, the lender can foreclose on the home.
Many people wonder why they can "discharge" or wipe out most credit card debts in bankruptcy without losing the things they charged, yet they'd lose their house or car if they didn't continue making payments. The answer is "collateral."
Lenders don't like to lose money. So when you take out a loan for an expensive purchase, you must agree that the home, car, or other item will serve as collateral to guarantee the loan.
The lender gets an ownership interest or "lien" that remains on the property, creating a "secured debt" until you pay for it. A mortgage lien allows the lender to sell your house at a foreclosure sale if you stop paying your mortgage.
Filing for bankruptcy doesn't remove mortgage liens. In most cases, if you don't pay, you'll lose the home. We explain a minor exception known as lien stripping below that rarely applies when home values are rising.
A home lender will foreclose if your house payment is past due and your Chapter 13 plan doesn't provide for the arrearages. You can also expect foreclosure if you stop paying your house payment during bankruptcy, fail to carry homeowner's insurance, or breach another mortgage provision.
But the lender must first get permission from the court. We explain the process below in the "How a Lender Lifts the Automatic Stay to Foreclose in Chapter 13" section.
You can't miss any. A Chapter 13 plan is a contractual agreement to pay creditors a particular amount during a specific time and often includes time-sensitive interest payments.
You'll start making your proposed Chapter 13 payment about 30 days after filing and before the bankruptcy court "confirms" or approves your plan. When necessary, payment amounts are adjusted after confirmation to allow you to complete the plan within three or five years.
If you were to miss payments, you wouldn't be able to complete your plan on schedule or as approved. So if you stop paying without making arrangements with the Chapter 13 trustee—the official appointed to oversee your case—the trustee will ask the court to dismiss your bankruptcy matter.
As long as you caught up the next month, missing one payment probably wouldn't derail your Chapter 13 plan. However, you'd need to pay any late fees and penalties not included in your plan payment. Otherwise, you could have a significant problem on your hands.
Suppose you pay your house payment through your Chapter 13 plan, You miss a plan payment because of unexpected expenses, but the trustee agrees you can catch up the following month.
The trustee doesn't cover your payment for you, so your house payment will go unpaid for a month. The lender will assess late fees and penalties, which can be hefty.
If you don't pay the trustee enough extra to cover late fees the following month, your account will show an outstanding balance, and your lender will assess new late fees each month, even though the trustee continues to send the monthly payment.
If you continue falling further behind each month, you could owe a sizeable payment to your lender at the end of the plan period, which, if large enough, could put you in a position of foreclosure again.
Most lawyers add an extra amount to the plan payment to cover these types of problems, but it isn't always enough. The best practice is to avoid missing payments when at all possible.
Learn about other options available when you can't make your Chapter 13 plan payment.
If you owe more than what your home is worth and you have multiple mortgages on the property, Chapter 13 offers a solution. You can remove or strip off a junior mortgage in Chapter 13 if the junior mortgage is "wholly unsecured."
Example. Suppose you have a $250,000 first mortgage, a $100,000 second mortgage, and a $75,000 third mortgage on a home worth $300,000. You could use the sales proceeds to pay the first mortgage if you sold the house. You'd also have $50,000 to pay toward the second mortgage. But nothing would be left for the third mortgage, leaving the third mortgage wholly unsecured. You could discharge the third mortgage in Chapter 13.
Stripping liens in Chapter 13 isn't automatic or straightforward. A local bankruptcy lawyer can explain the process, including how to prove your home's value.
Once you file a Chapter 13 bankruptcy case, the court puts an order called the automatic stay in place. The stay prohibits creditors from engaging in most collection activities.
The bankruptcy stay can help with foreclosure by preventing your lender from foreclosing on your house without obtaining court permission.
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 an opportunity to respond. If you don't "oppose" or fight 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, but your lender will be free to initiate or continue foreclosure proceedings.
If you oppose the lender's motion for relief, the judge will set a hearing and listen to each side's 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 make the payments. However, the court will likely lift the stay without further hearing if you fail to.
Learn more about what happens when a creditor tries to "lift" or remove the automatic stay.
It's likely, yes. But most lenders have a waiting period that must pass first, although some shorten it significantly if you can show that the bankruptcy filing was due to circumstances beyond your control.
You'll also need to satisfy income and credit score requirements. Learn more about buying a house after Chapter 13 bankruptcy.
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