Chapter 13 stops both mortgage and property tax foreclosures. Then you have up to 5 years to catch up on the property taxes.
Unpaid Property Tax Means You’re in Breach of Your Mortgage Contract
Just about every mortgage agreement obligates you to keep current on your home’s property taxes. Most even consider falling behind on property taxes to be a separate breach of the mortgage agreement and separate grounds for the mortgage lender to foreclose on your home.
The reason your mortgage lender takes the property taxes so seriously is that its mortgage is behind property taxes in priority on the title to your home. That means the lender risks losing the entire collateral on their loan—the home—if the county were to foreclose on the property taxes.
Practically speaking, if you’ve fallen behind on your property taxes that likely means that you are also behind on your mortgage payments. If you want to keep your home, you have to address both at the same time. That’s hard to do unless you have some help, particularly through a Chapter 13 “adjustment of debts.”
The “Automatic Stay” Stops Tax and Mortgage Foreclosures
The first kind of crucial help that Chapter 13 will give you is that it will stop any pending foreclosure of your home. Depending on the kind of foreclosure and the details of your state’s laws about it, once your home is foreclosed it’s generally too late. The filing of a Chapter 13 case, and the “automatic stay” it imposes, will immediately stop a foreclosure from happening, by either a mortgage lender or a county (or other property tax collector).
Enough Time to Pay the Back Property Taxes
After stopping a pending foreclosure, more than anything you need to buy time. If want to keep your home but you’ve fallen so far behind on your mortgage payments that you are also behind on your property taxes (by not paying into the escrow portion of your payment, or by not paying the taxes directly), you need a tool that will give you time to catch up on your mortgage(s) and on the property taxes.
Unless you have access to the usually very big chunk of money needed to bring the mortgage and property taxes current in a matter of only few weeks or months, or your mortgage lender is willing to re-write the mortgage altogether through a loan modification, you would need a long period of time to be able to catch up on the mortgage and tax arrearage. Otherwise you would simply not be able to afford it.
A Chapter 13 case gives you as long as 5 years to catch up on both. Although Chapter 13 cases can last anywhere from 3 to 5 years, in most cases you can go the full 5 years if you need to in order to keep the monthly catch-up payments as low as possible. Depending on your income, you can make it shorter (but usually no shorter than 3 years) if you can afford to pay more and catch up more quickly.
The “Automatic Stay” Prevents Upcoming Foreclosures
A Chapter 7 “straight bankruptcy” will stop a foreclosure essentially the same as a Chapter 13 filing. But the “automatic stay” in a Chapter 7 case almost always lasts only about three months. A mortgage lender can then either resume its previously stopped foreclosure, or start a new one.
But with a Chapter 13 case the “automatic stay” usually lasts the length of the case. A mortgage lender or county/property tax agency can ask the bankruptcy court for “relief from the automatic stay” in order to proceed with or start a foreclosure during the course of a Chapter 13 case. But that “relief” will usually be granted to the lender only if homeowner does not do what he or she agrees to do in the Chapter 13 payment plan. Otherwise, the lender/county just has to wait to get caught up over time. So with Chapter 13 you have the peace of mind that comes from not worrying every day about when a foreclosure will begin.
The Example
As a result of many months of unemployment, Jerry and Jane fell seriously behind on their home mortgage—a full year behind on their monthly payments of $1,500, a total of $18,000 behind on the mortgage itself. Plus they weren’t paying the additional $200 per month into their escrow account to pay their property taxes (and homeowner’s insurance). As a result, when it came time for their mortgage lender to pay their property taxes out of their escrow account, there was no money there to pay that year’s $2,000 property tax. At that point their mortgage lender started the foreclosure it had been threatening to do. The lender cited their lack of both mortgage and escrow payments as reasons for the foreclosure. Jane and Jerry also received notice from their county threatening a tax foreclosure for nonpayment of the property taxes.
After getting legal advice about their situation, Jerry and Jane decided that for both economic and personal reasons saving their home was worthwhile. With the help of their attorney they filed a Chapter 13 case. Their budget showed that, with both of them back at work at full-time jobs, they now could afford to pay the $1,500 monthly payment for the mortgage itself, plus the $200 more monthly into the escrow account to pay future property taxes and insurance. They could also afford to pay $400 per month into their Chapter 13 plan, which over the course of nearly 5 years paid off their $18,000 mortgage arrearage as well as their $2,000 property tax arrearage. Throughout those 5 years Jane and Jerry and their home was protected from foreclosure by both their mortgage lender and their county. When they finished their Chapter 13 case they were current on their mortgage and property taxes, and were debt-free otherwise.