A Chapter 13 Bankruptcy May Stop a Foreclosure Permanently
Unlike a chapter 7 bankruptcy that only delays a foreclosure, a chapter 13 bankruptcy filing may eliminate the threat of foreclosure by letting you slowly get caught up on past-due payments over a period of years, while at the same time, you must continue to make your regular monthly payment. Do not file the chapter 13 bankruptcy too soon, and instead pursue options to modify your payments discussed in the prior chapter. But you definitely do not want to wait too long and certainly should file the chapter 13 bankruptcy before the foreclosure sale.
You also need to leave yourself enough time to participate in required credit counseling with an approved credit counseling agency before filing bankruptcy. Fortunately you can do this over the internet or by telephone. See Chapter 25 for more information about this requirement.
Curing Delinquent Payments and Reinstating the Mortgage. Chapter 13 bankruptcy works best where you fell behind in your mortgage payments because of a temporary financial setback and you have resolved the problem that caused your setback. Filing the chapter 13 bankruptcy (the same as in chapter 7) automatically stops the foreclosure—at least temporarily. In addition you can pay back your delinquent payments in installments over a period of three to five years, but you must also make your regular monthly payments as they come due. You may have to pay interest on the back-due amount, a commission to the bankruptcy trustee for handling your payments, and certain fees the servicer has already charged, if they are legitimate.
For example, assume you are six months behind on $800 monthly mortgage payments so that you owe $4,800 and also assume the servicer has charged $600 in various fees. In a five-year chapter 13 case, you cure by making future $800 payments as they come due and catching up on the past-due $5,400 in sixty monthly payments of $90 each, plus interest and the trustee’s commission, so you pay $890 a month plus interest and the commission.
As long as there has not been a foreclosure sale, you can cure delinquent payments in a chapter 13 bankruptcy even if the servicer has already demanded you pay at once the full loan amount or even if a court has ordered a foreclosure sale. The bankruptcy process also gives you an opportunity to raise defenses to the lenders’ claim, including defenses that fees are excessive. These defenses can be raised as part of the determination as to how much you have to pay under your chapter 13 bankruptcy plan. Chapter 13 bankruptcy may also permit you to get rid of other liens and mortgages on your property. These bankruptcy options are discussed in Chapter 25.
Sale of a Home in a Chapter 13 Bankruptcy. If you can no longer afford your future mortgage payments, you will not benefit from bankruptcy’s ability to cure past delinquencies. You can, however, use the bankruptcy process to sell the home on your own in an orderly fashion, thereby keeping your equity and avoiding the problems of a foreclosure sale. This is likely to work only if the home’s sale price is enough pay both the mortgage lender and at least something to your other creditors.
Request that the court approve your realtor. When a sale is arranged, many title insurance companies require that you obtain an order from the bankruptcy court approving the sale and allowing the property to be sold free of liens.