Is Chapter 13 the Answer, or Are You Kidding Yourself?

22 Mar Is Chapter 13 the Answer, or Are You Kidding Yourself?

L. Jed Berliner’s recent post, Bankruptcy, Mortgages and Miracles, got me thinking about when a Chapter 13 is appropriate in order to stop a foreclosure. Chapter 13 can be a last, and sometimes only, chance to save your home. But when is Chapter 13 the right choice?

First, some basic facts about what a Chapter 13 can and cannot do. In most cases, a Chapter 13 won’t change the regular monthly payment you are required to make on your home mortgage (or mortgages, if you have more than one). Chapter 13 will not change the interest rate on your mortgage, or stop an adjustable rate from increasing your payment, or prevent a balloon payment from coming due. Shortly after filing Chapter 13, you will be required to resume making regular payments. (This is because most people cannot pay off their mortgages in 60 months, the maximum term of a Chapter 13.)

In addition to making regular mortgage payments, you will be required to begin making payments to the Chapter 13 trustee 30 days after the case is filed. The payments to the trustee go, at least in part, to catch up the mortgage arrears, while you make the regular payments going forward.

So, if you fell behind on your mortgage payments because you were out of work for a while, or you had unexpected expenses, or your income was interrupted by a tax levy, wage garnishment, or the like, Chapter 13 may be what you need. Chapter 13 will allow you to catch up over time, while your mortgage company may be demanding immediate payment of the entire past-due amount. If you fell behind because you were overextended on other obligations, like car loans and credit card debts, Chapter 13 may allow you to restructure your debt so that you can afford your mortgage payments.

On the other hand, if your mortgage is behind because you just don’t have sufficient income to make the payments, Chapter 13 may not help. Your budget may be too tight because of loss of employment, a disability, or because the repayment terms of your mortgage have changed. If your income has decreased, or if your mortgage payment has been adjusted upward, you may not be able to take advantage of Chapter 13 unless you are able to make up your budgetary shortfall by, for example, restructuring other obligations, or finding another (or a second) job. Failing that, a Chapter 13 may be doomed before it starts.

Chapter 13 can be a valuable tool to save your home, in the right circumstances. An honest assessment of your situation, including the realities of your budget, is a vital part of assessing the feasibility of a successful Chapter 13 Plan, and should be part of your discussions with your attorney.

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