I wrote an earlier post discussing how the equity in homestead real estate is almost always exempt (protected from seizure by bankruptcy trustees) in Minnesota bankruptcy cases. But protecting your house from the trustee is one thing; the person with money problems who has fallen behind on house payments has another concern. When there is a default in mortgage payments, the mortgage company can start foreclosure proceedings on a house, and unless the homeowner can quickly catch up on payments, the risk of the homeowner losing their home is very real. Can bankruptcy help?
The answer is that one chapter of the bankruptcy code – chapter 13 – can be a very effective tool to help homeowners preserve the ownership of their home. Chapter 13 allows homeowners to propose a repayment plan that includes catching up on past-due mortgage payments over a period of time, on a schedule the homeowner can afford. Curing mortgage arrears is one of the primary (although not only) attractive features of chapter 13 for someone who is experiencing money problems.
Here’s how chapter 13 works to keep a home mortgage out of foreclosure: the homeowner files a plan with the bankruptcy court that includes – among other things – a proposal for paying back past-due mortgage payments over a minimum period of 36 months up to a maximum period of 60 months. There is no interest charged on the back payments in a chapter 13 plan – so the homeowner gets a dollar-for-dollar benefit in repaying the mortgage. In order to have the bankruptcy judge confirm a chapter 13 plan (when a chapter 13 plan is approved by a bankruptcy judge, we call the approval confirmation), the debtor must propose to pay all of the mortgage arrears within the three-to-five year time period and also must stay current on the mortgage loan (the chapter 13 debtor pays the ongoing mortgage payment directly to the mortgage company).
Filing a chapter 13 case with the court will stop any collection efforts by the mortgage company to collect the past-due payments and filing a case will cancel a mortgage foreclosure sale, if things have gone that far. Chapter 13 is a strong protective tool!
But it takes a real financial commitment to preserve home ownership in a chapter 13 case – there’s the need to make a full mortgage payment every month plus make a chapter 13 payment to help pay down the arrears. Everyone in this situation should take the time to think things through in considering chapter 13. And speaking with an experienced bankruptcy attorney – like the attorneys at Kain + Henehan can really help your decision making. You can talk things over with an attorney at a free, no obligation initial appointment. Find us at kainhenehan.com to get your questions asked and answered!