How a Chapter 13 Bankruptcy can stop foreclosure and save your home.

A Chapter 13 or a Chapter 7 bankruptcy filing will stop a foreclosure provided you did not a have previous bankruptcy case dismissed within the past year (there are some minor exceptions.)  Why?  Because all collection actions against you and your property must cease do to the automatic stay of proceeding order you got when you filed.  So which should you file, a Chapter 13 or a Chapter 7? 

Chapter 7:  This type of bankruptcy is great if you want a “fresh start” and you want to be in and out of bankruptcy in 3 months, but it will not be of much help to you when it comes to saving your home.  There is no mechanism in a Chapter 7 to pay-off your mortgage payment arrears like there is in a Chapter 13 payment plan.  Therefore, the mortgage company will be able to get the stay lifted, and then proceed with a foreclosure since you have no bankruptcy stay to protect your property.  Furthermore, if you are behind in your payments at the time of filing but are not in default yet, since you must notify all of your creditors that you are in a bankruptcy, filing the Chapter 7 could actually trigger a default and start the process towards foreclosure.  And to make matters worse, if you are behind in your payments, in some jurisdictions, the Chapter 7 Trustee may move to take possession of your home in order to sell it if he believes you do not need it in order to rebuild your finances.

Chapter 13 Best Option:  Your Chapter 13 filing will contain a Payment Plan in which you agree to pay-off the mortgage arrears in installments within 60 months, as well as maintain your current monthly mortgage payment.  Once you have completed your Chapter 13 Plan, you are no longer in default, your unsecured debts have been discharged, and then your case is closed by the court.  However, you may also need to include any auto payments in the plan, as well as payments for your unsecured creditors if you have liquidatabel assets, your income is higher than average, you received a bankruptcy discharge within the past 4 years, or if you have priority tax debt.  Therefore this plan will only work if you can afford to make your mortgage payments now that the cash-flow problem that caused you to fall behind is over and you have extra cash in your budget to help you get caught up.

Chapter 13 Next Best Option:  If you do not have room in your budget to catch up on the arrears in the “Best Option” above but you can keep your payments current and you have substantial equity in your home, another option would be to submit a Chapter 13 Plan where you agree to keep the mortgage payment current.  Then it should be no problem to get the mortgage company to refrain from lifting the stay if you promise to sell your home within a reasonable time period and use the proceeds to pay-off the mortgage company in full.  That way, even though you may have lost your home, you did not lose the equity that had built up over time.

Chapter 13 Worst Option:  If you know you cannot afford to make your mortgage payments, let alone get caught up on the arrears and you have substantial equity in your home, another option would be to file the Chapter 13 without a viable payment plan and then dismiss the case when you have found a buyer for the property.  This is a very risky proposition for 2 reasons:  First, because you have not submitted a viable Chapter 13 plan, the mortgage company would have no trouble in getting the stay lifted and then proceed with the foreclosure.  So, you would have to make sure you got the property sold before the sale date.  Second, if the sale falls through and the mortgage company is slow in sending you a Notice of Default or Notice of Foreclosure, you are forbidden to file another bankruptcy case that includes the automatic stay of proceedings for 1 year.  NOT A GOOD IDEA!

Sometimes you have the option of modifying the mortgage when you fall behind.  You would have to apply for the modification with the mortgage company.  Typically, what modifications accomplish is a temporary reduction in the interest portion of your loan and then the missing payments (arrears) are placed at the end of you loan term.  Chapter 13 is a great option for homeowners who were refused a modification by their lender or they do not want to extend the term of their loan so they can build equity faster.  Also, it is possible for you to receive a modification while you are in a Chapter 13.  The Plan could then be modified to exclude your house payments while you continue with other debt payments and since the stay in is still in affect, your creditors including your mortgage company cannot take action against you without asking for the court’s permission by giving you notice and scheduling a court hearing.