Can Chapter 13 Save My House From Foreclosure?
Our legal team in Middletown, NY provides the answers you need
Chapter 13 is a very powerful, safe and effective tool to save your house from foreclosure. It provides two separate and distinct paths to rescue the home, all done under the protective umbrella of the Automatic Stay and the watchful supervision of the Bankruptcy Judge. It has distinct advantages over other, more limited procedures (i.e., Foreclosure Settlement Conferences, etc.) which focus solely on one path to save the house, namely, trying to get a mortgage modification.
For purposes of this analysis, posit a Hypothetical Homeowner wanting to save their house and dealing (or trying to deal) with the following all too common scenario:
- they are 6 months behind on a $2,500.00 per month mortgage obligation, bringing their mortgage arrears to $15,000.00;
- their lender will not accept partial payments and insists on a single, lump sum payment to cure the arrears;
- they owe the IRS $3,000.00 for income taxes due last year but not paid (Note: in bankruptcy parlance this is a “priority” debt that must be paid in full in Chapter 13);
- they owe $9,000.00 on credit cards, which is a “non-priority” debt that does not require full payment in most cases;
- they have take-home monthly income or $6,000.00 and monthly expenses (including the monthly mortgage payment) of $5,600.00, leaving them with disposable income of $400.00 per month.
How Chapter 13 would address this problem
The Hypothetical Homeowner in Chapter 13 could simultaneously pursue two (2) paths to save the house, either of which could result in the defaulted mortgage being brought current. The Chapter 13 Plan could simultaneously: (1) require a monthly payment of $400.00 be made to the Chapter 13 Trustee for a period of 60 months (note: Plans can be from 36 to 60 months long); and (2) request the entry of a Loss Mitigation Order, which is a fancy term for seeking a mortgage modification while in bankruptcy, with the Bankruptcy Judge overseeing the process.
- If the debtor is denied a mortgage modification, the problem is still very manageable. The $400.00 Plan payments over 60 months would: (1) fully pay (“cure”) the $15,000.00 mortgage arrears, bringing the mortgage current and “saving” the house; (2) fully pay the $3,000.00 priority debt owed to the IRS; and (3) result in a Discharge of the non-priority credit card debt, which would receive only a fraction of the amount actually owed.
- If the debtor obtains a mortgage modification, great—the house is “saved.” (1) The $15,000.00 mortgage arrears would be brought current by the terms of the modification and no longer require payment thru the Plan; and (2) in many (but not all) circumstances the Plan could be amended to reduce the $400.00 monthly Plan payment for the remaining months to an amount sufficient to pay in full the $3,000.00 IRS priority debt, the Trustee’s 10% commission and any other Administrative Expenses. The amount that would have to be paid toward the $9,000.00 credit card debt would be determined by many factors, requiring an analysis of your disposable income and the value of your non-exempt assets—this would be discussed with your attorney.
The “safety” of a Chapter 13 filing comes not only from the inherent protections of the bankruptcy process, but also from the flexibility afforded by not having “thrown all of your eggs into one basket.” It affords two separate and distinct paths to save the home, and only one has to work to solve the problem.
Compared to a state-court foreclosure settlement conference proceeding
When a New York State residential foreclosure lawsuit is commenced the homeowner and lender are invited to participate in a Mandatory Foreclosure Settlement Conference Proceeding (hereafter referred to as “The Proceeding”) supervised by a Foreclosure Referee (who, unfortunately, is not a Judge and lacks the persuasive tools available to a Bankruptcy Judge). The foreclosure lawsuit is held in abeyance until the conclusion of The Proceeding, whose purpose is to explore whether an acceptable remedy can be fashioned that does not result in the house being sold at auction. The homeowner will typically request, and be granted, the opportunity to apply to the lender for a mortgage modification. However, The Proceeding only offers this one, singular path to save the house, and it will typically be pending for many months (6 months or more is very common) before the lender issues either a “thumbs up” or “thumbs down” on the request for a modification. NOTE: the following analysis presumes The Proceeding lasted 6 months.
- If the homeowner obtains a mortgage modification, (1) the foreclosure lawsuit would be discontinued and the $15,000.00 mortgage arrears would be brought current by the terms of the modification; and (2) the homeowner would still owe the $3,000.00 income tax debt and the $9,000.00 credit card debt, which may or may not be manageable for them.
- If the homeowner is denied a mortgage modification, the problem is no longer a manageable one. (1) The mortgage foreclosure lawsuit would come back to life and proceed in its usual course; (2) the homeowner would still owe the $3,000.00 income tax debt and the $9,000.00 credit card debt; and (3) most importantly, the “fall-back” option of filing a Chapter 13 bankruptcy would no longer be feasible because the homeowner would be an additional 6 months (at $2,500.00 per month) behind on their mortgage—their arrears would now be $30,000.00 instead of the $15,00.00 at the commencement of The Proceeding. Since the homeowner’s budget could only pay out $24,000.00 over a 60-month term (with only $21,600.00 available for creditors after the Trustee’s 10% commission) the Chapter 13 Plan could not cure the $30,000.00 mortgage arrears and, for that reason, would not be Confirmed by the Judge.
NOTE: Although the above analysis is geared toward the Hypothetical Homeowner participating in the State Court Foreclosure Settlement Conference process, it is equally applicable if the Homeowner seeks an out-of-court modification prior to the commencement of the foreclosure.
By throwing all of their eggs into the “get a modification basket” and failing in that endeavor, the Hypothetical Homeowner is effectively precluded from being able to successfully pursue their best (and “fall-back”) option of filing a Chapter 13. A very tough price to pay for adopting a strategy that only provides one potential path to success.
Other relief available only in Chapter 13
While the issues confronting our Hypothetical Homeowner are rather narrow in scope, other homeowners with defaulted mortgages often have a myriad of other complicating factors, many of which also can be successfully addressed ONLY in Chapter 13:
- Underwater Second or Third Mortgages (i.e., home is worth less than amount owed on 1st mortgage) can frequently be avoided in Chapter 13. Upon completion of the Plan these junior mortgages would no longer be liens on the home.
- Judicial liens encumbering title to the home, except those based upon Domestic Support Obligations, can frequently be avoided in Chapter 13. Upon completion of the Plan these judicial liens would no longer be liens on the home.
- Tax Liens encumbering title to the home can be addressed to a certain extent in Chapter 13, although not as effectively as other types of liens.
Chapter 13 is specifically designed to allow homeowners to catch up on past due mortgage payments and gives them considerable control over the process, including being able simultaneously to ask for a mortgage modification. Some of its most important features/requirements are:
- Once the case is filed the debtor must re-commence making their regular monthly mortgage payments directly to their lender, WHO MUST ACCEPT THEM.
- The lender no longer can demand an immediate, lump sum payment of all arrears.
- Debtor’s Chapter 13 Plan proposes monthly (up to 60 months) payments be made to the Chapter 13 Trustee in an amount determined largely (but not totally) by debtor’s budget (Note: this will be discussed with your attorney), with the Trustee then paying creditors (including the mortgage arrears) according to the terms of the Plan.
- Certain statutory requirements do have be met for the Plan to be confirmed by the Judge, the most important of which (for purposes of this discussion) being that the mortgage arrears must be paid in full, albeit over the life (either 36 or 60 months) of the Plan.
Once the Chapter 13 Plan is confirmed by the Court the Order of Confirmation creates a binding contract between the debtor and the lender, with the Bankruptcy Judge resolving any disputes arising out of the new contract.
Contact Hayward, Parker & O’Leary today for dedicated assistance
For help related to New York bankruptcy matters, including Chapter 13 issues, contact the Middletown lawyers at Hayward, Parker & O’Leary today.