Chapter 13: a Tool to Stop Foreclosure
and a Tool to Reorganize your Finances
While Chapter 13 is a type of bankruptcy, it is not designed for those who want a total “start over” (Chapter 7 is the “start over” type of bankruptcy). Instead, Chapter 13 works well for hardworking families who have a steady income but who may have fallen behind because of an unexpected illness or temporary loss of income.
The automatic stay of Chapter 13 serves as an example of how federal bankruptcy law overrides your mortgage lender’s state law right to recover pledged collateral through a foreclosure sale. My Charleston, S.C. bankruptcy attorney Russ DeMott recently wrote a brief summary of the Chapter 13 process for his clients and with his permission I am reproducing most of that article here:
I’ve often referred to Chapter 13 as a tool. And here’s one thing the tool is good for: Stopping Foreclosure.
I got a call last night from a client whose home is scheduled to be sold at a foreclosure sale in a few days. He and his wife have very little unsecured debt (like credit cards). But they have one huge problem. A few months back the wife lost her job, and during the time she was unemployed, they fell behind on their mortgage payments. In fact, they fell way behind on payments.
The good news is the wife found another job and they now make enough money to make their house payments. The lender, as it the case all too often, won’t work with them to restructure their mortgage. It is insisting on a large lump sum in order to reinstate the mortgage loan. Like many things lenders do, this makes no sense. If the lender forecloses, it will end up owning the property. And foreclosure properties sell for significantly less than other properties. While waiting for it to sell, the lender must pay repairs, maintenance costs, utilities, and taxes. The home would then sell months from now for a huge loss and, on top of all this, the lender will have to pay a realtor’s commission at closing.
Despite this reality, lenders press on with foreclosure apparently glad to hasten their losses. Go figure.
Bankruptcy Stops the Foreclosure Sale
But here’s where Chapter 13 comes to the rescue. When your bankruptcy is filed, an automatic stay arises stopping the foreclosure. Note, however, that you must file bankruptcy before the property is sold. In Georgia under the “hammer rule,” once the foreclosure sale is conducted on the courthouse steps, the property is sold, and your ability to cure the mortgage arrearage is gone. So stopping the sale is the first step.
Your Chapter 13 Plan Allows You to Catch Up on Payments
In addition to being able to stop the sale, Chapter 13 allows you to catch up on missed mortgage payments. We call this “curing the arrearage.” For example, if you are $10,000 behind, you could propose to cure that arrearage by paying $200 per month into a five-year plan to do this. (And obviously if you are only $5,000 behind, you could propose $100 per month to cure the arrearage.) You’d also likely have other debts to deal with, like car payments which must be paid in your plan. But the big picture is that Chapter 13 allows you to do what your mortgage lender won’t. You simply pay a bit extra each month.
But What If I Can’t Afford My Mortgage Payments?
And there’s the rub. For Chapter 13 to work, you have to be able to resume making your regular, ongoing mortgage payments and, at the same time, paying an additional amount into your Chapter 13 plan to cure the arrearage. If you can’t make your regular payment, your plan is not “feasible,” and it won’t be approved by the court.
Chapter 13 can’t lower your mortgage payment. There is an exception to this in the case of a second or third mortgage that is wholly unsecured, which is something called “lien stripping.” But the general rule is that you can’t lower your mortgage payments in Chapter 13 under current law.
For many people, however, Chapter 13 is a great foreclosure avoidance tool, especially when the reason for the mortgage arrearage was a temporary loss in income like the couple who contacted me about their upcoming foreclosure sale.
Do Not Wait Until the Last Minute
As you can probably guess, Chapter 13 plans involve a number of calculations including mean testing, plan calculation, and budgeting. It is never a good idea to wait until days or hours before a scheduled foreclosure to start thinking about bankruptcy. You should also not assume that your mortgage company will act in good faith in their negotiations with you. Over the years I have seen many, many instances in which a mortgage company representative dragged out “negotiations” to restructure missed payments only to decide on the Friday before a Tuesday foreclosure that no deal was possible.
A far better solution: call my office at 770-393-4985 or email my office as soon as your mortgage company uses the word “foreclosure.” You may not need to file a Chapter 13 immediately but you will be prepared if the foreclosure process is started.
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