A Fresh Start on Your Home with Chapter 13
Jan. 22, 2016
Adjusting your mortgage and other home-related debts under Chapter 13 can often give your home the very best fresh start.
Our last two blog posts have been about two options for when you need help making mortgage payments: a mortgage modification and a forbearance agreement.
In a nutshell, a mortgage modification reduces the monthly mortgage payments through a permanent restructuring of one or more of the terms of the mortgage. A reduction in the principal amount of the mortgage debt is seldom included. So while modification can help in the short-term–if you’re fortunate enough to meet the relatively tight qualifying standards—be careful about what it costs you long-term.
With a forbearance agreement the monthly mortgage payments don’t change. The lender simply gives you a certain number of months to catch up on the unpaid mortgage payments, while at the same time you must also make your regular monthly mortgage payment.
So, mortgage modification addresses a permanent cash flow problem while a forbearance agreement addresses a shorter term cash crunch.
A Chapter 13 “adjustment of debts” can deal with either, in the right circumstances.
Chapter 13 vs. Mortgage Modification and Forbearance Agreement
From the start Chapter 13 is different from these other two options in one significant way—it’s not voluntary on the part of the mortgage lender. Instead of you trying to meet the lender’s qualification standards, you and your attorney put together a plan based on what serves your own best interests. Although you certainly have to follow some rules, you are given a lot of latitude as you do so.
For example, you do have to pay all the first mortgage arrearage before the end of the case, but you’re usually given 3 to 5 years to do so. That’s in contrast to a forbearance agreement which usually only gives you a few months, a year at the most.
And the amount you pay each month can vary depending on what other obligations may be more urgent for you. For example, if you have to catch up on a vehicle loan arrearage, or if you are behind on child support, those can usually be paid ahead of the mortgage arrearage. Or the amount paid on the mortgage arrearage can be reduced while you are paying certain other high priority debts or expenses. This kind of consideration for other debts would simply not be permitted in a forbearance agreement.
As for mortgage modification, you’re usually not required to catch up on the arrearage since that’s wrapped into the rewritten loan. With that advantage, and with a reduced monthly payment, modification can be better than Chapter 13.
Chapter 13 with Mortgage Modification
A mortgage modification can be the most effective in combination with Chapter 13, in a two respects.
First, a Chapter 13 case can help you succeed with a mortgage modification. Without collection pressure from your other creditors, you stand a better chance of getting past the modification’s trial period and getting a permanent modification. And by significantly reducing how much you pay your creditors each month, you will more likely be able to stick to the terms of the mortgage modification in the long run.
Second, a mortgage modification can help you succeed with your Chapter 13 case, in a couple ways:
A mortgage modification results in you paying less on your first mortgage as a result of lower monthly payments and no arrearage to catch up on. With less to pay towards the mortgage, that leaves more to pay other high-priority debts—such as recent income taxes and child support arrearage—that must be paid in full in a Chapter 13 plan in a maximum of 5 years. This means that a plan that would have been difficult to pay off in time becomes more feasible.
Similarly, with less money going towards the mortgage because of a modification, a plan that would have taken up to 5 years could be shortened to 3 years. Your income during the months before filing determines whether you plan must run a minimum of 3 years or 5 years. But even if you are only required to pay for 3 years, you are allowed to stretch the plan longer to reduce the monthly payment and better fit your budget. You’ll more likely be able to finish in 3 years if your monthly mortgage obligation is less, giving you more money to pay into your Chapter 13 plan.