Should I File Chapter 13 to Save My House?

A chapter 13 bankruptcy is the standard way most debtors who are behind in their mortgage payments use to help save their home. If refinancing, debt consolidation, or other methods aren’t available because your credit is bad or the numbers just don’t work, then chapter 13 can usually help you.

If you read my previous article titled How Bankruptcy Affects Buying a Home, you would have discovered the ins and outs of buying a home during bankruptcy, and that the process can be complicated without the help of an attorney.

A more realistic question to ask is whether you should declare chapter 13 bankruptcy to save your house in the case that you default on the loan?

There are some situations where a chapter 7 can help but the options are limited.

If your federal or state exemptions are more than the value of your home, then Chapter 7 may work for you.

Often though, the personal exemptions are not nearly high enough given the high cost of even the most modest home.

Chapter 13 is essentially a way to buy time to pay the arrears on your mortgage and other related expenses while you continue to pay future mortgage expenses.

Secured assets such as a home or personal residence

In chapter 13, you will be asked to list identity all of your assets and liabilities.

This includes debts that are secured by your assets.

The most common example of a security interest is the mortgage a homeowner gives to the bank in order to obtain the loan for the home.

The mortgage requires that you meet the monthly payments on time.

If you fail to meet the payments, you’re in default, the bank or whichever company holds the mortgage can foreclose on your home. Foreclosure means they can take possession of the home, sell it, and then use the proceeds to pay your debt.

Another example of a security interest is your vehicle.

Normally car owners give the car loan company the right to repossess and sell their vehicle if they don’t pay the car loans.

The Chapter 13 bankruptcy plan

Debtors who file a Chapter 13 must file a plan to meet the necessary payments. A bankruptcy attorney will explain what is required. There are several key parts to a standard Chapter 13 bankruptcy plan

• The arrears. This is the amount of money you owe the mortgage holder when you file your Chapter 13 bankruptcy petition. You will have three to five years to pay off the arrears. For example, if you owe $24,000 and you take five years (60 months), then you will have to pay $500 a month (24000/60) for five years.

If you have any other secured interests such as the car payment, you will need to pay off any car loan arrears in the same three to five year time frame.

• The regular payments. There are the payments you would be making if you were not in default on your home payments. You will need to pay this payment – typically on a monthly schedule for the same three to five year period.
• The unsecured debts. Debtors who file a Chapter 13 plan also need to propose a payment on behalf of the unsecured creditors. This sum isn’t broken down into arrears. Typically, you will offer to pay a small percentage of what is due based on your income and your expenses.

The payments are combined.

For example, if you need to pay the $500 from the example above, your regular mortgage payment is $1,000 a month, and you propose a payment of $100 a month to the unsecured creditors – then the total due is $500 plus $1,000 plus $100 = $1,600 a month.

The combined payments are paid, on a monthly schedule, to the US Trustee in bankruptcy who is assigned to your case.

The trustee represents the interests of the secured and the unsecured creditors.

The trustee does take an administrative fee, usually a percentage, before any funds are paid to the creditors.

This means that you will likely need to pay $1,600 plus another sum so that the creditors get what they are due and the trustee gets his/her fee.

The Chapter 13 discharge

The trustee will review your plain. If the plan is acceptable, then you will be able to keep your home provided you make the payments due under the plan – in a timely manner.

At the end of the three to five year period, your unsecured debts should be discharged.

By this time you should have paid your arrears payments in full.

You will still need to pay the secured creditors such as the mortgagee the mortgage payments that are still due – on a timely basis.

If you fail to make your payments to the trustee assigned to your case, the trustee will normally seek to dismiss your bankruptcy because you failed to meet the terms of the plan.

If the bankruptcy is dismissed, then the mortgage holder can seek to foreclose on your home. At this point is would be safe to say that it’s pertinent to find out everything you know about avoiding home foreclosure.

How your bankruptcy lawyer will help

Your lawyer will review all your options. If the only way you can save your home is through a Chapter 13 plan, the lawyer will help you determine how much money you will need to pay and what length of time you should choose to pay the plan amounts.

Not every homeowner can file a Chapter 13 bankruptcy and keep their home. Many debtors who are in default don’t have an income because they lost their job or became ill. The Chapter 13 option is for homeowners who have been able to get back on their feet somewhat but need time to pay off the arrears.