If you've fallen behind on your mortgage payments, catching up may prove challenging. Not only do mortgage companies add late fees to your unpaid debt, they also have the option to refuse partial payments. After a certain amount of time – often 90 days – your mortgage lender can "accelerate" your loan and demand you pay the loan balance in full. If you can't catch up, your lender will seize your home through foreclosure. Chapter 13 bankruptcy is one tool you can use to gain control of your debt while maintaining ownership of your home.
Chapter 13 Bankruptcy
Unlike Chapter 7 bankruptcy, which generally requires that you relinquish ownership of major assets, you can file bankruptcy under Chapter 13 without worrying that doing so will cost you your home. When you file Chapter 13 bankruptcy, you must submit a repayment plan to the court, which will take about three to five years to complete. The bankruptcy trustee reviews your income and expenses to ensure that your repayment plan is reasonable. You must make the agreed-upon payments to the trustee. The trustee then distributes your payments to your creditors.
When you file bankruptcy, your creditors must immediately suspend all collection activity against you – including foreclosure proceedings. This protection period is known as the "automatic stay." The automatic stay remains in effect until the bankruptcy judge confirms the repayment plan, your case is dismissed or you convert your case to a different bankruptcy chapter. Once the court confirms your repayment plan, you must begin making payments to your mortgage company and other creditors according to the terms of the plan.
Chapter 13 Discharge
After you complete your repayment plan, the court discharges your bankruptcy case. The court also discharges any remaining unsecured debt that you were not able to pay off during the repayment period. Only your mortgage arrears are included in the repayment plan. Thus, you will still owe your monthly mortgage payments throughout this process, as well as after the process is complete. You will not, however, owe any additional charges and fees that you incurred prior to filing for bankruptcy. Because a Chapter 13 discharge eliminates your responsibility to pay off other forms of debt, such as credit card debt and collection accounts, you may find that you have more disposable income than you possessed prior to the bankruptcy – making paying your mortgage less financially taxing.
If you're serious about saving your home from foreclosure, it is crucial that you keep up with your bankruptcy payments and follow the court's instructions. If you default on your repayment plan or fail to comply with any of the court's additional stipulations, the judge in the case can dismiss your bankruptcy. Should this occur, you will lose the protection of the automatic stay and your mortgage lender can once again initiate foreclosure proceedings against you.