by: Kathleen Michon, J.D.
When you file for Chapter 13 bankruptcy, you do not lose any property to the bankruptcy trustee (including your home), nor does the bankruptcy filing affect your mortgage.
However, although you won't lose your home through the Chapter 13 bankruptcy process, you can still lose your home through foreclosure. This means that you must continue to make your mortgage payments during Chapter 13 bankruptcy if you want to keep your home.
If you are facing foreclosure, Chapter 13 can help. First and foremost, it allows you to make up mortgage arrears through your plan (something you cannot do in Chapter 7 bankruptcy). In addition, you can remove second mortgages and HELOCs in certain circumstances.
Here's how it all works.
If you want to keep your home, you must stay current on your mortgage payments during your Chapter 13 case.
In many Chapter 13 bankruptcies, you will pay your mortgage lender directly. In some, however, the court and trustee will require you to make your mortgage payments through your Chapter 13 plan. The trustee then pays your lender with this money. If given the option, it's almost always better to pay your lender outside of your Chapter 13 plan. This is because the trustee's fee is based on a percentage of your plan payment. The higher your plan payment, the more fees you pay.
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. This gives you three to five years to make up the arrears. This feature of Chapter 13 is one reason why many people facing foreclosure opt for Chapter 13 over Chapter 7 bankruptcy.
If you are in foreclosure when you file for Chapter 13 bankruptcy, bankruptcy's automatic stay stops the foreclosure. If you stay current on your mortgage payments, and make up the arrears through your Chapter 13 plan, the lender cannot foreclose.
If you have second or third 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. 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, any remaining loan amounts on the stripped off mortgages are discharged. (For more on how this works, see Removing a Second Mortgage in Bankruptcy.)