You can stop foreclosure with a Chapter 13 bankruptcy filing.
This is one of the primary advantages, in fact, that a Chapter 13 has over a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is one of the most powerful legal tools available in Michigan for escaping overwhelming debt.
In Chapter 7, you do not need to repay any of your debt. The process concludes in just 4 or so months. It only requires 1 court hearing. Most Detroit bankruptcy attorneys charge affordable flat fees for the entire Chapter 7 bankruptcy process.
Unfortunately, the usefulness of Chapter 7 when the goal of the bankruptcy is to stop foreclosure has its limits.
This Article will explain how you can stop foreclosure with a Chapter 13 bankruptcy. It will discuss the timing of a Chapter 13 bankruptcy filing and why you should not wait to explore this option if your home is headed for foreclosure in Michigan.
What Is Chapter 13 Bankruptcy?
The reason that Chapter 13 bankruptcy can stop foreclosure is that it is a reorganization bankruptcy process.
That is, Chapter 13 does not simply discharge debt, it allows you to choose which debts to pay first, ahead of others.
Secured vs. Unsecured Debt
Outside of bankruptcy, in your real world budget, all creditors are created equal. At least, this is true according to them! Credit card balances have the same, overlapping due dates as medical debt bills, car payments, demands for payment of back rents owe, and—your mortgage payments.
There are legal differences in these types of debts, however. And those differences are crucial to your understanding of the Chapter 13 ability to stop foreclosure dead in its tracks.
What are those differences?
There are 2 different types of debt, in and out of Chapter 13 bankruptcy: secured and unsecured.
Secured debts are those which have some cash or property contractually pledges as collateral. A pledge of collateral means that the debt is “secured.” That is, if you don’t pay the debt, that collateral property will be seized by the creditor to whom you owe the money.
On the other hand, unsecured debt involves no pledge of collateral. It is debt owed due to a simple contractual requirement to pay.
A mortgage loan is secured debt. When you purchase a home in Michigan, you sign 3 documents:
- The promissory note (“Note”);
- The mortgage;
- The deed.
The Note is the contract that requires you to pay $X per month for X months in full repayment, including interest, of the amount of money borrowed to purchase a home.
The deed is the title to the home, the document that is filed with the Register of Deeds of Wayne County, Macomb County, Oakland County, Washtenaw County, or other that formally lists you as the owner of that plot of land.
The mortgage is the contract that you sign that pledges the property as the collateral securing the obligations described in the Note.
If you breach the Note contract, the mortgage is the instrument under Michigan state law which entitles the lender to take possession of the securing collateral.
That is, your home.
Thus, when you need to stop foreclosure, you need a legal remedy with the power to override the rights guaranteed to the lender in that mortgage contract.
That is what Chapter 13 bankruptcy does.
Chapter 13 Bankruptcy: The Power of Federal Law
Chapter 7 and Chapter 13 bankruptcy are Federal legal processes. That means that they preempt, or override, Michigan state law when it comes to the discharge of debt and even the foreclosure process.
The Note and mortgage that you sign when you purchase a home are instruments created pursuant to Michigan state law.
When you file a Chapter 13 bankruptcy, the question of whether or not your creditors are paid becomes, instantly, a Federal legal issue, with very few exceptions.
A Chapter 13 will stop foreclosure, initially, because of its Federal preemption of the Michigan state law-based foreclosure process.
The moment you file a Chapter 7 or Chapter 13 bankruptcy, a Federal legal injunction known as the Automatic Stay of Collections activates.
The Chapter 13 Automatic Stay
No creditor, secured or unsecured, may proceed with any collection activity once the bankruptcy case is filed without violating the Automatic Stay.
Creditors who violate the Automatic Stay can be sanctioned by the US Bankruptcy Court, upon motion of your Detroit bankruptcy attorney.
This means that they may have to pay fines, your Michigan bankruptcy lawyer’s fees, or other penalties.
Thus, filing a Chapter 13 bankruptcy will stop foreclosure if one is underway when the case is filed.
But there is a timing caveat here. If your home has already been auctioned at the county sheriff’s sale, you cannot stop foreclosure with a Chapter 13 and save your home.
Here, Michigan state law steps back in to control the question once again. A concluded foreclosure sale means that you only retain a right of redemption. You do not have a property interest other than that redemption right.
There is, that being the case, nothing that Chapter 13 can do for you. That is, except discharge any remaining “deficiency debt” looming over your head if the sheriff’s sale winning bid was less than you owed on the mortgage.
This is still some good, but it is also something that Chapter 7 bankruptcy can do. A post-foreclosure deficiency debt is, now, an unsecured debt that is totally dischargeable.
How Chapter 13 Will Stop Foreclosure Permanently
Presuming that you do file your Chapter 13 case before your sheriff’s sale, the Automatic Stay requires your mortgage servicer to stop the sheriff’s sale.
But what then?
This is where the reorganizational nature of Chapter 13 is a vast improvement over the “straight discharge” of Chapter 7.
In a Chapter 13 bankruptcy, you do not simply discharge your debt and go home.
Instead, you “reorganize” your debt. You restructure your debt repayment according to the type of debts you owe.
The US Bankruptcy Code establishes a priority order for the repayment of debt in Chapter 13. Secured and other “priority” debts (such as child support arrears or tax debts) are paid ahead of unsecured debts.
Whereas, outside of bankruptcy, all creditors all want to be paid at the same time, in Chapter 13, they have to stand in line. And shut up.
This means that your secured mortgage payment and your secured mortgage arrearage are paid ahead of your unsecured debt in a Chapter 13 bankruptcy.
Creditor Payment in Chapter 13 Bankruptcy
In a Chapter 13 bankruptcy, instead of paying your creditors directly, you make a monthly payment to the Chapter 13 Trustee assigned to your case by the Detroit, Flint, Bay City, Lansing, Grand Rapids, or Kalamazoo Bankruptcy Court.
That Trustee takes your payment and pays your creditors for you. According to the priority order required by the Bankruptcy Code—and according to the Chapter 13 payment plan drafted and filed by your Michigan bankruptcy attorney.
The Chapter 13 Plan states how much you will pay each month and which creditor will be paid in what order.
Your mortgage payments will be paid first, after your bankruptcy lawyer’s fees and the Trustee’s fees.
Your unsecured creditors only receive whatever is left over at the end of the 3-5-year Chapter 13 bankruptcy process.
Whatever they receive is all that they get. Any balance left owing to them “on paper” is totally discharged just as it would be in a Chapter 7 bankruptcy.
Exiting the Chapter 13 Bankruptcy Process
Thus, when you enter the Chapter 13 bankruptcy process, you stop foreclosure. And, when you exit the process, you have cured the foreclosure.
That is, through your Chapter 13 payment plan, you will have caught all of your delinquent mortgage payments up and you will have stayed current in all ongoing monthly mortgage installment payments.
You will either own your home free and clear, having totally paid it off through the Chapter 13, or you will be current in your mortgage payments with no arrearage.
Even better, in the Eastern District of Michigan bankruptcy courts, including Detroit, Flint, Bay City, and Ann Arbor, you’ll exit with a Court order in hand that says, in print, that you were current in your mortgage payments as of your date of discharge.
If your mortgage servicer or any future services tries to claim that you were behind on your payments as of that date or earlier, this will be a powerful weapon for use in combatting such allegations.
Stop Foreclosure with Chapter 13 Bankruptcy Once and For All
Unlike a short sale or mortgage modification negotiation, a Michigan Chapter 13 bankruptcy will stop foreclosure without the need for your mortgage servicer’s agreement.
You do not have to waste time speaking with your servicer or negotiating anything. Your mortgage servicer simply has to comply with Federal law when you file your Chapter 13—and that’s it. They have no ability to deny your right to cure your mortgage with a Chapter 13 bankruptcy.
They do have the right to object to your Chapter 13 Plan and to ensure that your Plan complies with Federal law and local Bankruptcy Court Rule. They do have rights within the Chapter 13 process, and they will work to capsize your bankruptcy whenever possible.
Thus, it is vital that you retain an experienced and aggressive Metro Detroit Bankruptcy Attorney to represent you in your Chapter 13 process.
The Hilla Law Firm has successfully represented hundreds of clients through Chapter 7 and Chapter 13 bankruptcy processes in Michigan.
Offering free, virtual consultations and friendly, one-on-one service from Livonia bankruptcy attorney John Hilla, we will ensure that your matter is handled properly, competently—and with kindness.
Click the button below to directly schedule your free consultation or contact us at (313) 380-0492.