| Q. Does a chapter 13 bankruptcy always stop a foreclosure in its tracks? |
| A. Yes, in the short run, as long as everything in the bankruptcy is filed properly and all parties receive notification of the bankruptcy docket number. |
| Q. For people who want to use a chapter 13 bankruptcy to keep their house long term how does it work? |
| A. Imagine a chapter 13 as a machine with multiple moving parts. First a chapter 13 provides for an “Automatic stay” to prevent legal action, like a foreclosure, from proceeding against the debtor, and then the debtor provides a plan to reorganize their finances and pay back the creditors. |
| Q. Pay them back? I thought a bankruptcy wiped out your debts? |
| A. A chapter 7 might discharge all debt, but a chapter 7 does not permit most people to retain long term ownership of their home. To compare these two areas of bankruptcy read the chapter 13 vs. chapter 7 FAQ. |
| Q. What else will I need to pay in a chapter 13? |
| A. Just as you get to start over with your mortgage arrearage in a chapter 13, you may address your credit card debt and other unsecured debt like medical debt or personal loans in a new way. |
| Q. How does one address unsecured creditors in a chapter 13 bankruptcy and what will the debtor pay? |
| A. Let’s imagine the most typical chapter 13 bankruptcy repayment plans. Figure that you get to reduce your unsecured debt to ten cents on the dollar. Then use the same formula discussed above to pay that amount over 60 months plus the trustees fees. |
| Q. Knocking my credit card debt down to 10 cents on the dollar and paying that over 5 years sounds pretty great. This is normal for a chapter 13 bankruptcy? |
| A. Yes, that kind of treatment for credit card and other unsecured debt illustrates one of the great advantages of choosing a chapter 13 bankruptcy to achieve debt relief. |
| Q. Are there any other special perks to filing a chapter 13 bankruptcy? |
| A. With either a chapter 13 or a chapter 7 bankruptcy you get the option to void contracts. This become particularly usefull with deals you may have wished you never signed. Examples include the ability to give back a timeshare or return a leased car. |
| Q. Is there more to pay in a chapter 13? |
| A. Certain people will have other payments that must be built into the chapter 13 plan as well, such items might include past due real estate taxes, IRS taxes, other judgments, car loans and even attorney’s fees to carry out the chapter 13 filing |
| Q. Suppose I say that all sounds great. I can make my payments over those 60 months and have several hundred dollars extra each month to go to the track. |
| A. Chapter 13 plans allow for people to reorganize by getting money to their creditors as fast as possible and get them as much as possible. If you have extra money they will shorten your plan so you have $100 or less to spend each month, until your reorganization plan shrinks down to 36 months. |
| Q. What happens when I still have extra money at a 36 months chapter 13 repayment plan? |
| A. You would start to pay more than 10 cents on a dollar toward your unsecured debt. |
| Q. How high could that payment go? |
| A. If your budget allowed for 100 cents on a dollar they would demand a plan to pay the unsecured creditors in full. |
| Q. Enough dreaming, what if I can’t make the regular mortgage payments plus the payments to resolve my past debts? |
| A. Your chapter 13 will eventually fail, or you might decide how that filing a chapter 13 bankruptcy given your circumstances looks like the wrong debt solution. |
| Q. If I could make the payments, who gets the moneys? |
| A. Most debtors make two payments for their chapter 13 reorganization plan. First they pay the mortgage company directly or “outside the plan” then almost all other payments to work with past debt get paid within the plan to the bankruptcy trustee, the trustee then cuts all checks needed to each individual creditor as well as taking a 10 % fee for their own work. |
| Q. If I can not afford that much each month can the bankruptcy judge order the bank to reduce my payment? |
| A. No, the bankruptcy court in a chapter 13 case does not have the power to reduce the payment of a second debt, if you want to keep the secured asset. |
| Q. So in a chapter 13 bankruptcy by the time I am done paying my regular mortgage payment plus a portion of my arrearage, my payment ends up going up instead of down? |
| A. Yes, in most cases that’s exactly right. |
| Q. What options exist to make my mortgage payments go down? |
| A. A mortgage modification remains about the only way to achieve a lower mortgage payment. |
| Q. Options where my mortgage payment goes down sound much better. When would a chapter 13 bankruptcy emerge as a better choice even though monthly payments increase? |
| A. |
- Mortgage modification programs never address unsecured debt, like credit cards. People with large unsecured debt issues address all financial problems in a chapter 13.
- Rather than a modification banks sometimes only offer a repayment plan, bank repayment plans might last 6-24 months, so a chapter 13 plan at 60 months allows for lower payments compared to repayment plans.
- If a homeowner fails to start the
process soon enough they may not have the lead time for other options, while a chapter 13 bankruptcy comes together relatively quickly.
- Often attempts at a mortgage modification fail leaving a chapter 13 bankruptcy as the only viable option. In some cases the lenders refuse to talk about any options besides paying on full or foreclosure. People almost always have the right to file a chapter 13 bankruptcy.
|
|
| Q. Don’t people who own homes and get in trouble have laws and right that work for them to make the bank lower their payments and help them stay in their house? |
| A. No. The government makes it clear that they would prefer if banks worked with homeowners in avoiding foreclosures and most times the banks want to stay away from foreclosures even without any legislative push. Despite this, people need to understand that each party only comes to the table with one option each that they may exercise without consent of the other. The bank maintains the right of foreclosure against the property and the homeowner may trump that with the ability to file a chapter 13 bankruptcy. Anything else including mortgage modifications, repayment plans or any of the other require both parties to agree. |
| Q. Can the bank object to my chapter 13 plan and try to start foreclosure again? |
| A. As long as you put together a plan that meets the standards for a reasonable reorganization and you make all of your payments, chances are the bank will not object and if they would object the judge would rule in your favor. |
| Q. Can you describe the process and timing if things fall apart for the debtor in a chapter 13 bankruptcy? |
| A. When a chapter 13 bankruptcy reorganization plan begins crumbling the trustee may move to dismiss the case or the debtor can dismiss it on their own. The bank or other creditor may request a “relief from stay” which would allow them to continue collection or foreclosure activity stopped by the bankruptcy filing if the bankruptcy judge grants their motion. |
| Q. Do I get the right to object to the motion for relief from stay? |
| A. Yes, but you better have a well reasoned plan for how you hope to make up past due payments and proceed with current payments. A judge might just deny the motion or you might get the chance to amend your reorganization plan and continue in your chapter 13 if you can be convincing that you might succeed. |
| Q. If the bank gets relief from stay do they start the foreclosure process over from the beginning? |
| A. Many times that would be the case, but some especially experienced foreclosure lawyers know how to pick up right where they left off. This becomes especially significant when you live in a state where starting over means a six month process compared to picking up from the spot where they left off leaving you only a few weeks until the foreclosure auction. |
| Q. Exactly how does it work and what should I expect if I file a chapter 13 bankruptcy? |
| A. For more on this read the and payments inside chapter 13. I also have a chapter 13 bankruptcy faq just dealing with a failed chapter 13. |
