How Can Chapter 13 Bankruptcy Help if You Are In Foreclosure?
If you are in foreclosure, you may be looking at a way to save your home. We recently wrote about Chapter 7 bankruptcy and what it can and cannot do to help you if you are in foreclosure. One thing that Chapter 7 cannot do is save your home, at least not directly. But Chapter 13 bankruptcy does provide an avenue for you to save your home—if you meet the legal requirements.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is often seen as less desirable than Chapter 7, because in Chapter 13, you will be obligated to make some payments to creditors over a period of about 3-5 years, whereas in Chapter 7 there is no payment plan; your debts are just automatically discharged.
But don’t let that scare you away from Chapter 13 bankruptcy. Chapter 13 offers a number of benefits and advantages over Chapter 7, and one benefit is the ability to directly save your property if it is being foreclosed on.
Generally, in a Chapter 13, you must have the financial ability to make a reasonable payment to your creditors with disposable income left over after paying your regular expenses. Your attorney will propose and the court will approve a plan to pay back your debts, although you usually will not have to pay 100% of the amounts you owe. At the end of the 3-5 years, all of your debts are discharged.
How Chapter 13 Can Help in Foreclosure
Like Chapter 7, when you file for Chapter 13, the foreclosure case will stop because of the automatic stay.
If you are able to pay a Chapter 13 plan that pays off some of your back owed, missed mortgage payments (called arrearages), and at the same time continue making your regular mortgage payments (among other requirements), your plan will be approved, the foreclosure will stop, and as long as you continue to make your payments under the plan on time, at the end of the plan, you will be considered current under the mortgage, the foreclosure will go away, and you can continue paying and keep your property.
Obviously, Chapter 13 is best when you want to keep your property. If you are looking to walk away from the property without owing anything, your best option may be a Chapter 7, although based on your income, you may not have a choice between Chapter 7 or 13. This is why it is a good idea to see a bankruptcy lawyer as early in the foreclosure process as possible so that you know what your options are.
One other benefit to a Chapter 13 is that if you have property that is not protected (exempt) from bankruptcy, like investment or rental property, you do not risk losing the property in the bankruptcy the way you could lose it in a Chapter 7.