Saving Your Home with Chapter 13 Bankruptcy
While either a Chapter 7 or Chapter 13 bankruptcy is one of the most cost-effective and efficient legal means of walking away from an underwater or foreclosed home available, it is also, under the right circumstances, a better means of saving a home in danger of foreclosure than other non-bankruptcy strategies that require the cooperation of the bank holding the mortgage, such as mortgage modification and other work-outs.
Surrendering a home in bankruptcy enables you to walk away from the property without fear of either future collections or of a negative taxable consequence, without any negotiation with the bank holding your mortgage required.
However, you may not want to walk away from your home. If your home is underwater or over-mortgaged only because of the presence of a second or even third mortgage on your home, it may be possible to remove those secondary mortgages with a Chapter 13 reorganization bankruptcy. If you are in danger of foreclosure only because you have missed some payments, a Chapter 13 can also give you an opportunity to make up those payment deficiencies while under the protection of the Bankruptcy Court, free from fear of threats of foreclosure.
The first thing that a Chapter 13 Bankruptcy will do in assisting you in saving your home is to stop any foreclosure or other collection proceeding dead the moment the Chapter 13 is filed. When you file either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, a master discharge under Federal Law called the “automatic stay against collections” clicks into place, preventing any foreclosure currently underway from proceeding. The foreclosing bank must cease any foreclosure action, including stopping any foreclosure sheriff’s sale currently scheduled.
With that automatic stay in place, you propose to the Bankruptcy Court through your Plan a repayment scheme:
- First, to cure a mortgage arrearage, you propose paying each month the basic contractual mortgage payment you are required to pay on your first mortgage.
- Next, if there is an arrearage or deficiency in your payment history that has triggered a foreclosure process by your mortgage lender, you propose paying off that arrearage as a lump sum with some interest over the period of your Plan. For example, if you were $5,000 behind in your mortgage payments and proposing a 60-month Chapter 13 Plan, you would propose paying an extra $84 per month to your mortgage lender ($5,000 divided by 60).
- Thus, when you exit your Chapter 13 Plan in no more than 60 months and in as few as 36 months, you would have maintained your mortgage payment and cured any deficiency, resolving the need for a foreclosure and saving your home.
In addition, as mentioned, you may also be able to discharge a second or third mortgage on your home. If you home is worth less than you owe on a first mortgage in fair-market value terms, your second mortgage is not actually secured by the value of the collateral securing that loan—the house. That second lien may thus be “re-classified” as unsecured debt and stripped off, paid in part and the discharge balanced entirely by the Chapter 13, the lien on record with your county required to be removed by the lien-holding bank after the Chapter 13 discharge of debt is issued by the court.
This process is applicable only to bankruptcies in Michigan, where The Hilla Law Firm practices.
If a foreclosure is imminent, you have a steady stream of income, and you would like to save your home without spending a year or more negotiating with your mortgage creditors, a Chapter 13 Bankruptcy may be a viable option for you.
The Hilla Law Firm, PLLC is experienced with all aspects of Chapter 13 bankruptcy and has successfully saved many homes from foreclosure. If your mortgage lender is threatening foreclosure, contact us immediately to schedule a free, initial consultation.