Now more than ever Americans are getting behind on their mortgages, usually through no fault of their own. Many people have been laid off or furloughed because of the COVID-19 pandemic, or at the very least have seen their normal working hours diminish.

And while the CARES Act, which took effect on March 27, 2020, allowed many to seek a mortgage forbearance for terms of up to 180 days. What many people are now realizing is that forbearance is not the same thing as forgiveness and that these skipped payments will eventually need to be repaid.

Repaying or catching up multiple missed mortgage payments can become increasingly difficult as unemployment ends.  Even those who are lucky enough to have found re-employment or are back at their old jobs may have a difficult time coming up with a lump sum payment of $5,000.00 -$20,000.00 or more, and if the bank is not willing to work with you and you do not qualify for a mortgage modification you may have limited options.

However, there is one option that remains, and it may just be your best bet.

Chapter 13 Bankruptcy:

Filing for a Chapter 13 bankruptcy can be an ace up your sleeve when it comes to stopping the foreclosure process once it has started and saving your home. The Chapter 13 is a repayment plan bankruptcy that gives the filer the time they desperately need to catch up their arrearage when the clock feels like it is about to run out.  And it does so without the requirement of having to make a large lump sum payment, which may be impossible to come by for most.

Under the Chapter 13 bankruptcy plan, the court takes into account a filer and their spouse’s monthly income after taxes and deductions  as well as their monthly necessary living expenses (excluding payments on unsecured debts such as medical bills, credit cards, and unsecured loans which will be included in the plan) to calculate their disposable income at the time of filing. This disposable income is then used as the basis of a court approved repayment plan that typically lasts 3-5 years, during which payments are made directly to the Chapter 13 Trustee, who will send these payments directly to your creditors.

While you will be required to pay the mortgage arrearage by the end of the plan (from the payments made to the Trustee), you will not have to come up with a lump sum all at once. And the best part is that you may only be required to pay a very small percent of your other debts, if you can show that you cannot afford to do so.  Most of the attorney fees also go into the plan as well. And remember during this time you will not have to pay those high credit card minimums and ridiculous interest rates, and that debt will be discharged after the plan is complete.

The Automatic Stay:

The “automatic stay” is the most beneficial aspect of the Chapter 13, and it goes into effect at the time you file the case. You can think of the automatic stay as an invisible shield created by the bankruptcy code that protects you from your creditors by prohibiting them from attempting any further collection efforts. This includes most importantly stopping the foreclosure proceedings, even if they have already begun, and even if a judgment has been entered and a sale date has been set. While it is not recommended to wait until the last minute to file, I have seen clients file the day before a sale date and save their house from foreclosure. The automatic stay also stops the harassing phone calls, halts lawsuits, prevents repossessions, restores utility services, and even halts wage garnishments.

Once your case is filed, you will be expected to make your regular monthly payment to the mortgage company at the normally scheduled time, failure to do so could cause the automatic stay to be “lifted” and allow the mortgage company to proceed with the foreclosure.

Other Benefits of the Chapter 13:

  • Stopping the repossession on a vehicle that is behind and allowing you to pay the vehicle payment in your plan. This can have the added benefits in some circumstances of lowering high interest rates, spreading out the payments over the length of the plan to allow you to pay less overall monthly.  In some circumstances your attorney can even bi-furcate the auto loan claim to allow you to pay only what the car is worth and not what you owe on the loan.
  • You can also surrender an upside-down vehicle, boat, camper, ATV, or other secured piece of property and treat any remaining deficiency as unsecured, which as mentioned can often be discharged at the conclusion of your case.
  • Restructuring your debt by lowering the interest rates on the credit cards.
  • Chapter 13 may also allow you to keep property you otherwise might have lost in a Chapter 7, such as a paid for boat, or vehicle that may have equity beyond the exemptions the state allows for that particular piece of property.

While this post highlights many of the benefits of filing for a Chapter 13 bankruptcy, there are potential issues that will need to be discussed with an experienced bankruptcy attorney prior to filing. I urge you to reach out to our office at (850) 438-6603, or through our contact form on our website to schedule a FREE consultation to discuss the specifics of your situation and learn how Chapter 13 can help you save your home.