You have much, much more time to catch up on unpaid mortgage payments, as well as any unpaid property taxes.
Last week we wrote a blog post that listed 10 ways Chapter 13 helps you keep your home. Here’s the first of those ways it can help:
1. Gives You More Time to Catch up on Unpaid Mortgage Payments
Chapter 7 usually gives you a very limited amount of time, usually a year at the most, to catch up on your mortgage loan. In contrast Chapter 13 often gives you years to catch up. This can greatly reduce how much you have to pay each month to eventually get current. The much lower catch-up payments per month can be crucial. That’s especially true if you are many thousands of dollars behind on your mortgage(s). Having so much more time to cure the arrearage often makes the difference between losing your home and keeping it.
We recognize that this explanation might be a little dry. So today let’s see if we can bring it to life and have you can see how this Chapter 13 benefit could really help you.
Assume that your monthly mortgage payment, including the property tax “escrow” portion, is $1,200. Because of losing your job 2 years ago, you fell behind by 10 payments, or $12,000. You’ve gotten a new job but it does not pay as well as your earlier one. So cash flow is very tight.
You want to keep you home but the mortgage lender has threatened foreclosure for being so far behind. Your bankruptcy lawyer has advised you that if you filed a Chapter 7 “straight bankruptcy” case this lender would likely give you about 12 months to catch up on your missed payments. This means having to pay $1,000 per month on top of your regular $1,200 mortgage payment. Even after legally writing off your debts in a Chapter 7 bankruptcy, you could absolutely not come up with that extra $1,000. So you would not be able to satisfy your mortgage lender and would lose your home.
Chapter 13 Solution
A Chapter 13 “adjustment of debts” would likely solve this dilemma. You’d have as much as 5 years to catch up on the $12,000 back payments. This would bring that impossible extra $1,000 per month down to a much more manageable $200 or so per month.
Why is it that you have that much more time in a Chapter 13 case? It’s because your mortgage lender is stopped from starting or continuing a foreclosure throughout the case’s 3 to 5 year lifetime. A lender can ask the bankruptcy court for an exception to this protection. But if your payment plan is feasible based on the information you present through the help of your lawyer, and if you make the payments required by your plan to catch up on the mortgage, then the court will likely continue the protection of your home.
A Property Tax Twist
Let’s now also assume $200 of that monthly $1,200 payment was for property taxes. So your 10 unpaid payments result in you being $2,000 behind on property taxes.
With most mortgage contracts falling behind on property taxes is a separate breach of the contract. It gives your mortgage lender an independent reason to foreclose (beyond being behind on your mortgage payments).
There’s a sensible reason for that. Eventually the county or other property tax creditor could itself foreclose on your home. The county or property tax creditor is usually legally ahead of your mortgage holder on the home’s title. So at least in theory your mortgage lender could be foreclosed off the property as well. This could leave the lender with absolutely nothing, something it absolutely won’t let happen.
That’s one of the reasons mortgage lenders are so aggressive in insisting that you catch up on the missed mortgage payments—including the property tax portion—so quickly.
Chapter 13 to the Rescue Again
This dilemma is solved by Chapter 13 neatly as well.
When you’re behind on property taxes, the county/property tax creditor is also stopped from foreclosing the home. Your home is protected from that creditor the same as from the mortgage lender. The county/property tax creditor inability to take action against the home protects the mortgage lender as well. Now the mortgage lender no longer needs to be afraid of a foreclosure by the county/property tax creditor. So the lender no longer has this separate justification for its own foreclosure.
Your Chapter 13 payment plan just needs to detail how you are feasibly going to catch up on the property taxes. Of course the plan needs to show that along with how you’re catching up on the mortgage arrearage itself. And then you need to actually make the payments into that plan to demonstrate that you are actually going to catch up on both sets of arrearages as laid out in your plan.
Back to the Example
So let’s go back to our hypothetical example. You’re behind 10 payments of $200 in property taxes, or $2,000. You are behind 10 payments of $1,000 in mortgage payments, or $10,000.
Your Chapter 13 plan could state that you would be paying $50 per month towards the $2,000 property tax arrearage. And you would be paying $170 per month towards the $10,000 mortgage arrearage. Let’s assume that you and your lawyer could demonstrate that you can afford to make these payments. If everything else was in order the bankruptcy court would then presumably approve the payment plan.
You’d be well on your way to getting current on your home and saving it permanently from foreclosure.