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Making Sense of Bankruptcy: Catch up on your Home Mortgage Arrearage

A Chapter 13 “adjustment of debts” gives you many tools to save your home, starting with giving lots of time to catch up on your mortgage.

In this “Making Sense” series, we’re helping you understand bankruptcy by explaining each important concept through a single explanatory sentence, explained.

Today’s sentence: Filing a Chapter 13 case stops or prevents a foreclosure and then gives you as much as 5 years to cure a mortgage arrearage as long as you follow the rules.

The word and phrases in bold are each explained in the following sections.

The Chapter 13 “Adjustment of Debts”

Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” are the two main kinds of consumer bankruptcy. A Chapter 7 case usually only takes a few months—often not more than about 3 months—while a Chapter 13 case usually takes 3 to 5 years. But Chapter 13 can give you the power to accomplish many things that you can’t accomplish under Chapter 7.

This is especially true when it comes to saving a home under threat of foreclosure or other creditor pressures. A very direct way that Chapter 13 makes holding onto your home possible is to prevent it from being foreclosed and then give you time to bring the mortgage current.

Stops Foreclosure

The filing of any kind of bankruptcy immediately stops a creditor whose debt is secured by collateral from repossessing or taking the collateral from you. A foreclosure sale is definitely the kind of creditor action which bankruptcy stops. This benefit of bankruptcy is called the “automatic stay,” which strictly prevents creditors from pursuing you or your assets in the collection of their debts once you file a bankruptcy case. So if your home is on the brink of a scheduled foreclosure sale, filing a bankruptcy case before that sale happens will prevent it from happening.

Prevents Future Foreclosure

You may be behind in your mortgage payments but have not been informed that your home is being foreclosed. Or you may have received such a threat but have not been told when a foreclosure is scheduled to happen. Either way the “automatic stay” imposed by your bankruptcy filing would prevent a foreclosure from being scheduled in the first place.

But the question is how long would a bankruptcy prevent such a foreclosure? And how can bankruptcy solve the problem so that your mortgage lender has no longer has a reason to foreclose?

As mentioned earlier a Chapter 7 bankruptcy case is over in about 3 months, with the protection of the automatic stay ending then as well (if the lender didn’t ask for and get permission to end that protection even earlier, while your case is still open). If you are not too far behind on your mortgage, your lender may be willing to let you get current in a few months. But if you can’t enter into such an agreement, the lender could just begin a foreclosure as soon as your Chapter 7 case would be over.

5 Years to Cure the Arrearage

But with a Chapter 13 case the automatic stay can last the full 3 to 5 years that the case lasts. During that period of time, your Chapter 13 payment plan would focus your financial energies on paying off the mortgage arrearage. Then at the time your case would be over, you’d be current on the mortgage and in good standing with your lender, who would then of course have no further reason to foreclose.

Follow the Rules

You CAN lose the protection from foreclosure during the years of a Chapter 13 case if you don’t follow some basic rules. To keep up the protection you must:

  1. Keep current on the regular monthly mortgage payments. Chapter 13 is all about catching up on the mortgage arrearage amount as of the date the case was filed. The system does not treat kindly those who fall further behind through new missed payments.

  2. Maintain homeowner’s insurance on your home. Your mortgage lender is counting on your home as collateral on the mortgage loan. If the home is destroyed by fire or otherwise, without insurance, your lender would lose its collateral, which you had promised to protect with insurance. So don’t let your homeowner’s insurance lapse or else you will be in effect inviting your lender to ask the court for permission to foreclose.

  3. Keep current on your property taxes. If you fall behind on property taxes, that usually gives the mortgage holder an independent reason for asking the bankruptcy court for permission to foreclose, regardless how current you are or are not on the mortgage payment itself.

Why? Because the county or whatever other governmental entity is owed the property taxes could conceivably foreclose on the property and take it from both you and the mortgage lender. In practice the lender would usually pay off the back taxes to avoid that from happening. Nevertheless a borrower’s inability to keep current on the property tax is considered strong grounds for giving the mortgage lender permission to start a foreclosure.

The Sentence Explained

The sentence we started with is:

Filing a Chapter 13 case stops or prevents a foreclosure and then gives you as much as 5 years to cure a mortgage arrearage as long as you follow the rules.

The translation is:

Filing the “adjustment of debts” type of bankruptcy protects your home by stopping a scheduled foreclosure from going forward, and by preventing a foreclosure from being scheduled if one hadn’t already been. This protection from foreclosure gives you a long time to catch up on your arrearage in mortgage payments—as long as five years—IF you keep up your regular monthly payments, as well as any required homeowner’s insurance premiums and property taxes.