How Chapter 13 Bankruptcy Affects Mortgages and Foreclosure

Learn about the options you have to deal with your mortgage or a foreclosure in Chapter 13 bankruptcy.

If you’re worried about protecting your house, unlike Chapter 7, Chapter 13 offers ways to keep it. But you’ll have to demonstrate that you have enough income to:

  • afford to continue making the payment
  • catch up on arrears over three or five years
  • pay your creditors for any equity you can’t protect with an exemption, and
  • make any other required Chapter 13 payment amounts.

Another benefit of Chapter 13 that isn’t available in Chapter 7 is this: If your house is worth less than the amount you owe on your first mortgage, you might be able to use Chapter 13 to remove the junior mortgages.

Get tips that will help you choose between Chapter 7 and Chapter 13.

Paying Mortgage Payments During Chapter 13

If you want to keep your home, you must stay current on your mortgage during your Chapter 13 case. In many Chapter 13 bankruptcies, you will pay your mortgage lender directly. In some, however, the court and Chapter 13 trustee appointed to oversee your case will require you to make your mortgage payments through your Chapter 13 plan—especially if you owe arrearages when you file. The trustee will pay your lender each month.

Keep in mind that the trustee receives a percentage of all of the funds paid through your plan—and you’ll pay the trustee that amount. If given the option, it's almost always better to pay your lender outside of your Chapter 13 plan. The higher your plan payment and the more the trustee receives to pay creditors, the more you’ll pay in fees.

Mortgage Arrearages in Chapter 13

If you want to keep your home, you'll have to pay back all of your mortgage arrears by the end of the repayment period. But you don’t have to pay all at once. You’ll have three to five years to make up the overdue payments. This feature of Chapter 13 is one reason why many people facing foreclosure opt for Chapter 13 over Chapter 7 bankruptcy.

Chapter 13 and Foreclosure

If you are in foreclosure when you file for Chapter 13, bankruptcy's automatic stay—the order that stops most creditors in their tracks—puts a hold on the foreclosure. If you stay current on your mortgage payments and make up the arrears through your Chapter 13 plan, the lender cannot foreclose.

Stripping Off Junior Mortgages

If you have junior mortgages or a home equity line of credit (HELOC) that are no longer secured by the equity in your home, you can strip these loans off through Chapter 13 bankruptcy. Here’s how you tell.

Determine the value of your home. If that value is less than the mortgage in first position—the first debt secured by the home—then the junior mortgages are completely unsecured. Nothing would be left to pay the junior lenders after a home sale. You can strip off wholly unsecured loans in Chapter 13. If, however, even a dollar remains to pay the junior mortgage, it isn’t wholly unsecured, and it wouldn’t qualify for removal.

The stripped off loan becomes part of your unsecured debt, which is paid off (usually at a steep discount) through your Chapter 13 plan. At the end of the repayment period, the court will discharge any remaining loan amounts on the stripped off mortgages.

Read more about removing a second mortgage in bankruptcy.

Exempting Equity in Chapter 13

You don’t lose property in Chapter 13. That doesn’t mean that you pay less to your creditors than you would have had you filed for Chapter 7. Here’s how it works.

Each state decides the type and amount of property filers can protect. These amounts appear in the state’s bankruptcy exemptions. You must pay your creditors an amount equal to the value of any property you can’t protect with an exemption. You’ll learn how much home equity you can protect by researching your state’s homestead exemption.

Find out more about how home equity can affect Chapter 13.

Other Required Chapter 13 Payments

Before the court confirms (allow) your Chapter 13 repayment plan to go forward, you’ll have to demonstrate that you have sufficient income to meet other required payments. For instance, you’ll have to pay priority debts in full throughout your repayment plan, such as support obligations and new tax debt.

Find out more about the other debt you must pay in Chapter 13.

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