Will Bankruptcy Save My House?

Posted by Terry Goddard | Jun 22, 2013 | 0 Comments

This is another question that often drives people to file for bankruptcy protection.  The short answer is yes, but like everything else in the law there is a but.  The only guaranteed way to save your house through bankruptcy is by filing for protection under Chapter 13 of the bankruptcy code.  This form of bankruptcy is often referred to as payment plan bankruptcy.  Both forms of bankruptcy will stop foreclosure or other action against your home but Chapter 13 is the only way to permanently stop these types of proceedings.

In all bankruptcy cases, as soon as you file the case something called the automatic stay goes into effect.  This is essentially a court order that stops any and all collection action against you whether the collection action is a law suit against you or a foreclosure proceeding.  Through this order is also how bankruptcy stops wage garnishment.  The stay, generally, remains in place until you obtain your discharge.  In a Chapter 13 case that is between 3 and 5 years.  In both a Chapter 7 and Chapter 13 a creditor can ask the Court to lift the stay under certain circumstances.  In the case of secured debts, like a house or a car, the big reason to lift the stay most often cited by the secured creditor is that you have failed to make payments that have come due after you filed bankruptcy.  A motion to lift the stay filed by a creditor is generally governed by 11 U.S.C. § 362(d).

How exactly does a Chapter 13 save your house?  In answering this question there are a couple of assumptions.  The first assumption is that you are in fact behind on your mortgage payments.  For most people this means you have missed at least three monthly payments.  While most people filing for Chapter 13 protection have missed several more months than 3, generally lenders will not begin to take action until you are at least three months behind.  A second assumption is that you have a steady source of income.  A Chapter 13 case requires a monthly plan payment and to make that payment you must have some form of consistent monthly household income.  A final assumption is that you in fact want to keep your house and can afford the current monthly mortgage payment, unless and until you can obtain some form of loan modification.

These assumptions are important.  The monthly income is important because, as noted, you need to make a monthly plan payment.  If your only debt is the missed mortgage payments your monthly payment will be whatever that total is, some deferred compensation for your attorney, and the Chapter 13 Trustee's statutory fee.  Whatever that total is will be divided by the length of your plan, between 36 and 60 months.  That result, whatever it may be, is your monthly plan payment.  There are other factors that go into the monthly payment such as if you still owe on a car loan, you owe back taxes, and you owe on other secured debts.  Another consideration is what your household net monthly income is after allowed and reasonable expenses are deducted.  The overriding rule in a Chapter 13 is that all available disposable monthly income is to fund the plan.  This is generally for the benefit of the unsecured creditors.

How Chapter 13 saves your home is really very simple.  Over the term of your plan you are paying off the accrued mortgage arrearages while at the same time making your normal monthly mortgage payment.  As a consequence, once your plan is done you have paid off all the arrearages and have made your monthly mortgage payments.  As a result, your loan is current when you complete your plan.  Keep in mind that the mortgage arrearages total will be more than just your missed monthly payments and will include late fees, missed escrow payments, interest, costs, late charges, and lender attorney fees.  All of this will often add thousands of dollars to the total.

By way of example, let us say you have missed 10 monthly mortgage payments at $1,500 each, which results in mortgage arrearages of $15,000.  Your lender has added late fees, late charges, interest, and attorney fees of $4,500 so you have total mortgage arrearages of $19,500.  You still owe your attorney $3,000.  As a result, your plan must pay at least $22,500 (keep in mind this does not include a review of what your actual net monthly household income is).  The Trustee fee on this case would be roughly $2,250 for total plan funding of $24,750.  You are able to pay this amount over 60 months, which would generate a monthly plan payment of at least $413.00 a month plus your normal monthly mortgage payment and other household expenses like utilities, food, medical, and vehicle gas.  As you can see, plan payments can get high if there are other debts that need to be paid in full during the term of the plan like tax debts and car loans.

This is how Chapter 13 saves your home.  Next week I will discuss how other types of secured loans are handled in bankruptcy.

About the Author

Terry Goddard

Terry L. Goddard Jr. heads the firm's consumer and small business bankruptcy group in both the Baltimore and Southern Maryland offices of Skeen & Kauffman LLP. Terry has over six years of bankruptcy experience assisting clients navigate the complex and intimidating filing for protection under Chapter 7 and Chapter 13 of the bankruptcy code. Terry has been a practicing attorney since 2002.


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