Bankruptcy Law: Chapter 13 and Foreclosure

Chapter 13 Bankruptcy can be a very effective approach to defending a residential foreclosure.  Many Chapter 13 cases are filed with the primary goal of stopping a foreclosure from completing and utilizing a plan of reorganization to get caught up on mortgage payments.  The automatic stay in bankruptcy will freeze a foreclosure action immediately upon the filing of the bankruptcy case in most instances, and the foreclosure will stay frozen as long as the requirements of the plan or reorganization are met.

Typically, a homeowner in Chapter 13 will resume making direct monthly mortgage payments to the mortgage creditor once the bankruptcy case is filed.  These post-filing payments will not be applied to past due arrears.  Rather, a post-filing payment will be applied as the payment due for the current month in which is was paid.

But what of the pre-filing arrears?  Typically, the pre-filing arrears (consisting of not only monthly mortgage payments, but sometimes also escrow shortages, court fees, late fees, and the bank’s attorney fees) will be cured in the Chapter 13 plan of reorganization.  In this scenario, the homeowner will have two debt payments each month: 1) the mortgage payment; and (2) the plan payment, part of which is applied to past due mortgage payments.  Of course, to afford payments, the homeowner in bankruptcy must be able to demonstrate sufficient income and ability to make all required payments.  A homeowner may not qualify for Chapter 13 if said homeowner has little to no income.

In a successful case, once the plan is complete and all pre-filing arrears are paid, the Chapter 13 case will conclude.  The homeowner can then exit bankruptcy completely current on his or her mortgage.  Once current, the threat of foreclosure disappears.

Additionally, many courts offer mediation programs for the purpose of negotiating a mortgage modification with the mortgage creditor.  If successful, a modification can bring a mortgage loan current, resulting in the immediate ending of the foreclosure process.  Future blog entries will elaborate on the mediation process.

Bottom line, Chapter 13 is, in many cases, the best and last hope to prevent a home from being lost in foreclosure.  Should you have any questions regarding foreclosure or the Chapter 13 process, contact Nickolai & Poletti, LLC.

Anton Nickolai