How Will Chapter 13 Bankruptcy Affect my Mortgage?

Under current bankruptcy law, judges cannot change the terms of a mortgage contract.  Since the collapse of the housing bubble, several attempts have been made by federal lawmakers to give judges the power to “cram down” mortgages in a Chapter 13 bankruptcy.  This power would allow them to restructure the debt into two distinct pieces:

• Secured piece equal to the current fair market value
• Unsecured piece equal to the remaining loan principle after the market value is subtracted

The bankruptcy judge would have the option of canceling the unsecured piece, thereby reducing the principal owed on the home.  Legislation such as this was last defeated in Congress in December 2009.

How Chapter 13 can help

A home mortgage secured by the real estate is not discharged in a Chapter 13 bankruptcy.  However, it can help to save your home from foreclosure through these ways:

• It allows judges to eliminate some fees imposed by lenders
• It may delay the foreclosure long enough to allow the homeowner to catch up on late payments
• Unsecured debts may be reduced or discharged, resulting in freeing up money that can be used toward paying the mortgage
• Some secured debts may be rescheduled to lower the payments, also freeing up money that can be used for the mortgage

Chapter 13 Proceedings

Filing a petition for bankruptcy automatically stops most debt collections against the debtor and his property.  This “stay” does not require a court judgment since it happens by operation of bankruptcy law.  However, it is temporary and only intended to allow time for the bankruptcy proceedings to progress.  During this period, creditors are prevented from filing lawsuits or instituting wage garnishments to satisfy their outstanding debts. 

Assuming the foreclosure sale has not already taken place, a foreclosure action is immediately stopped by the filing.  The borrower can use this as an opportunity to try and cure mortgage delinquencies.  The Chapter 13 will result in a court-ordered plan to restructure the debt, which acts as a debt consolidation loan.  The debtor makes regular payments to the appointed trustee who then distributes the money to creditors in accordance with the plan.  This would include mortgage payments and the debtor would no longer have direct contact with the mortgagor.

It’s important that the repayment plan ordered by the court is adhered to every month.  Otherwise, the home could still be lost.  The fact that payments have been reduced and stretched out does not change the obligation to pay them.

Bankruptcy Law Dynamics

Bankruptcy laws are complex and have undergone significant changes over the years.  Since the unraveling of the credit crisis in 2008, more changes have been proposed and debated. 

Get Legal Help

A consultation with a bankruptcy lawyer is highly recommended before considering this option to alleviate your debt problems.