An Excerpt from Bankruptcy: A New Beginning by Seth Hanson
The short answer is yes. A Chapter 13 bankruptcy can save your house from foreclosure. Chapter 7, in contrast, only provides a temporary solution, as it will typically only postpone the foreclosure for three months. After the Chapter 7 case is over, the bank can proceed with the foreclosure, unless it asks the judge permission to foreclose sooner.
A Chapter 13 bankruptcy is a powerful tool that can be used to stop the foreclosure during the life of your bankruptcy, typically 5 years. A Chapter 13 bankruptcy can also be used to fully catch up on the payment of mortgage arrears. In other words, you can use Chapter 13 bankruptcy to have your mortgage fully reinstated. You can come out of a Chapter 13 bankruptcy to get back in good standing on your mortgage.
Imagine that—back to full good standing with your mortgage. No arrears. No demand letters. No notices of default. No threat of foreclosure. No losing sleep for fear that you will lose your home. No worrying where you will live. Complete good standing with your mortgage company. Oh, and by the way, all your other debt will be resolved in the Chapter 13 bankruptcy too. You can see why many people take advantage of Chapter 13 to help with their mortgage problems.
Sometimes people ask if a Chapter 13 can alter the contractual terms of their mortgage, like reducing the interest rate, modifying the principal balance, forgiving the arrears, etc. Chapter 13 cannot do these things. If you file Chapter 13, your choices are limited to surrendering the home or saving the home by curing the arrears and staying current on all post-filing mortgage payments. Some bankruptcy courts, like those in the Eastern District of California, require the ongoing post-petition mortgage payments to be made through the Chapter 13 plan.
Other bankruptcy courts, like those in the Northern District of California, permit the ongoing post-petition mortgage payments to be made directly by debtors outside of the Chapter 13 plan. Another tool available only in Chapter 13 that can be used with mortgages is the ability under Section 506 of the Bankruptcy Code to strip off junior liens that are wholly unsecured. This situation arose often during the huge drop in home prices during the Great Recession. Where someone has more that one secured loan against their home, any junior lien that is wholly unsecured— i.e., the home is worth less than any senior lien so that there is not even a pennyworth of equity to cover the junior lien in question—can be treated as general unsecured debt. For example, if someone has a $50,000 home equity loan, a $300,000 senior mortgage, and home that is worth only $250,000, then Chapter 13 bankruptcy permits that person to strip off the junior home equity loan. The $50,000 home equity loan will be lumped together with credit card debt and treated the same as all the general unsecured debt in the bankruptcy. At the end of the Chapter 13 process, the holder of the home equity deed of trust is then supposed to file a release of lien with the county recorder. If that does not happen, you may need to take additional action with the bankruptcy court to quiet title or otherwise clear up title. Another point to keep in mind when using a Chapter 13 to address mortgage problems is that all post-filing housing related payments need to be kept current. This includes property taxes, property insurance, and home owner’s association dues.
Perhaps the most dramatic success I have seen with a Chapter 13 and a second mortgage was a case where we successfully stripped off a second mortgage in the approximate amount of $250,000. This particular client had very good income. His Chapter 13 plan was set up to pay back a very large portion of the general unsecured debt. As it turns out, though, luck was on his side. After we obtained the order from the court treating his second mortgage as general unsecured debt, Bank of America issued a letter as part of a global, multi-state settlement. In their letter Bank of America completely forgave the balance owing on his second mortgage. $250,000 worth of debt disappeared. I believe the only reason Bank of America chose his loan to forgive was because the bank saw that the court had already granted the motion to treat the second mortgage as unsecured. I don’t expect this to happen again in my career, but it stands an example of the tremendous power of the bankruptcy process.
For more information contact your Fairfield bankruptcy attorney.
Categorized in: Bankruptcy