If you are trying to avoid a foreclosure on your home, filing for bankruptcy under Chapter 13 may be a good strategy. (If saving your home is your only reason for filing for bankruptcy, though, you may want to consider alternatives to bankruptcy that could accomplish the same goal while using less drastic means.) A Chapter 13 repayment plan can incorporate payments of mortgage debt that otherwise might result in a foreclosure. You may be able to get rid of second or third mortgages in your repayment plan as well. The plan will last for three to five years and involve monthly payments to your creditors. By contrast, Chapter 7 may delay foreclosure temporarily but is less likely to prevent foreclosure permanently.
However, you should make sure that you can keep up with your current payments on the mortgage in addition to paying overdue payments. If you are unable to keep up with payments moving forward, you may eventually lose your home to foreclosure once the automatic stay expires. The automatic stay usually will stop foreclosure proceedings from the time that you file under Chapter 13 until the completion of your plan, unless you do not keep up with payments under the plan.
Keeping a Home
In contrast to Chapter 7, keeping a home in Chapter 13 is based on whether the filer can use their projected disposable income, rather than their non-exempt property, to repay their unsecured creditors at least as much as they would have received under Chapter 7.
When an Automatic Stay Does Not Stop Foreclosure
There are certain situations in which a foreclosure may proceed even while an automatic stay is in effect. A debtor cannot prevent foreclosure by repeatedly filing for bankruptcy. If a lender seeking foreclosure successfully had the court lift the automatic stay for a bankruptcy in the last two years, filing under Chapter 13 again will have no effect on the pending foreclosure. Also, if your repayment plan does not involve paying back overdue mortgage payments, the foreclosure process will resume once the plan is approved. Filing under Chapter 13 can create a useful delay, however, during which you can stay in your home for months or even years and plan your next living situation.
Modifying a Mortgage
You should be aware that you can only modify a mortgage on your residence if the loan covers additional buildings or property, a multi-unit building, or a mobile home, or if it is secured by additional property. However, if you meet one of these conditions and owe more on your mortgage than the value of your home, you can ask the bankruptcy court to modify the mortgage. The debt will remain secured in the amount that corresponds to the equity in the property, while the rest of the debt will become a non-priority unsecured debt. Many Chapter 13 repayment plans involve paying back non-priority unsecured debts, but some provide for only partial repayments or may leave them out entirely.
Another potential benefit of filing under Chapter 13 is eliminating any second or third mortgage that you have taken out on your home. Depending on the value of your home and any depreciation, you may have no additional equity in it once the first mortgage is taken into account. Similar to the process of modifying a mortgage above, the court may turn subsequent mortgages into non-priority unsecured debt. This is known as the process of stripping a mortgage. You may not need to pay off these subsequent mortgages at all, or you may need to pay off just a small portion.
A filer can ask the bankruptcy court to strip a junior lien on their home, but if they do not complete their Chapter 13 plan, they will need to pay that mortgage.