Regain Control of Your Mortgages with Chapter 13

Mortgages are a form of secured debt. While filing chapter 7 will stop a lender from suing you personally to collect a mortgage deficiency, it will not stop the lender from enforcing its rights in the home that serves as collateral on a defaulted mortgage.

Generally, the home will only be protected if you are current on the mortgage.

But because the purpose of chapter 13 is to restructure and reorganize debts, it allows you (to a certain extent) to actually affect the lender's rights in the collateral. In this case, your home.

Therefore, through a chapter 13 reorganization you can stop foreclosure, get rid of a second mortgage, pay-off (cure) past due balances, and reduce certain mortgages to the market value of the property securing the loan.

Stop Foreclosure

Filing a consumer bankruptcy case immediately stops any and all creditor collection efforts - including foreclosures. To stop the foreclosure, the chapter 13 bankrutpcy case must be filed before the home is sold at auction. If the case is filed in time, the lender must seek permission from the bankruptcy judge to continue the foreclosure.

The bankruptcy judge will not grant the lender permission if you propose a chapter 13 plan through which you pay off (cure) the default (arrearage) within a "reasonable period of time," and continue to make your regular mortgage payments. In Chicago, "reasonable period of time" generally means the duration of the chapter 13 plan. As long as all payments are made on time, the automatic stay will remain in effect and the bankruptcy judge will not give the lender permission to foreclose on the property, thus allowing you to cure any default.

If you cannot afford to propose a plan to cure the arrears and make regular mortgage payments at the same time, the bankruptcy judge will generally give the creditor permission to continue with the foreclosure. The good news, however, is that chapter 13 can make curing arrears much much easier. Chapter 13 allows you to seriously restructure all your other debts to maximize availability of funds you can dedicate to curing the mortgage default.

First, under chapter 13 you can prioritize mortgage arrearage payments ahead of any payments to unsecured creditors. This means that your lender gets paid first - before any of your unsecured creditors. The unsecured creditors only get whatever money remains in the pot after your arrears have been paid. Any unpaid unsecured debt balances are discharged upon completion of your chapter 13 plan.

Second, under the chapter 13 you can reduce ("cramdown") other secured loans to the market value of the property serving as collateral. These reductions in principal will allow you to dedicate even more money towards curing the mortgage arrearage.

Finally, chapter 13 stops fees and penalties and even accruing interest, assuring the past due balance will not grow as you catch up.

I will let you know if chapter 13 is a viable option for your situation during the initial consultation before you even file.

foreclosure / BKguy nutshell:

  1. Automatic stay stops foreclosure proceeding before property is sold.
  2. You pay-off past due balance (arrearage) by making your Chapter 13 plan payments monthly to the Chapter 13 trustee who distributes the funds to your lender.
  3. You continue making regular mortgage payments directly to your lender on your own or through the Chapter 13 trustee.
  4. As long as all your payments are timely made, the automatic stay remains in effect and the lender cannot foreclose on your home.
  5. Interest, fees, and penalties related to the arrearage stop.
  6. You restructure all your other debts to dedicate more funds to curing the default.
  7. You pay-off the past-due balance within the plan period and your home is safe.

Eliminate a Second Mortgage or Home Equity Line of Credit ("Lien Strip")

Chapter 13 allows you to wipe out (strip) the second mortgage lien when the market value of the property is less than the balance of the first mortgage (underwater or upside-down). This lack of equity leaves the second mortgage completely unsecured. Under the provisions of chapter 13, completely unsecured second mortgages or home equity lines of credit can be treated like unsecured debts - e.g. credit card debts.

Accordingly, you treat the second mortgage lender as a creditor with the lowest priority and pay only what you can afford for the duration of the plan. Upon completion of the chapter 13 plan, the remaining balance is discharged and the lender is ordered to release the lien on your property (i.e. the lien is "stripped").

While this is a simple concept, it requires additional proceedings in bankruptcy court. These proceedings allow the bankruptcy judge to review evidence about the value of the property so the judge can carefully determine whether the second mortgage is completely unsecured. The additional steps are necessary because second mortgages usually have sizeable balances and stripping them is considered an extraordinary remedy. Afterall, the lender will lose the collateral securing the loan and in many cases receive only cents on the dollar for the balance.

lien strip / BKguy nutshell:

  1. Wipe out (strip) the second mortgage lien when the market value of the property is less than the balance of the first mortgage.
  2. The second mortgage lender is treated like an unsecured creditor and receives only what you can afford to pay for the duration of the plan.
  3. Upon completion of the plan, any unpaid balance is discharged and the lender is ordered to release the lien.
  4. Requires additional procedural steps in bankruptcy court.

Reduce Mortgage to Market Value of Property ("Cramdown")

Reducing the mortgage balance to the value of the property (cramdown) is only possible on property other than your primary place of residence. Therefore, this chapter 13 provision is usually of limited use to the ordinary consumer.

However, if you should own underwater investment property, you can reduce the mortgage balance to the market value of the property securing the loan. There is one big caveat. To cramdown the loan, the reduced balance must be repaid during the period of the chapter 13 plan that cannot exceed 5 years.

Contact me directly with any questions or concerns by phone, text, or email.