Chapter 13 bankruptcy protection, governed by the federal bankruptcy code, allows debtors with a steady income to reorganize their debts using a three to five-year repayment plan. Throughout this time, a court-appointed trustee pays the debtor’s creditors with the debtor's finances according to the terms of the court plan. Since Chapter 13 offers protection from foreclosure during the life of the plan, it can help debtors save their homes.
As soon as you file a voluntary Chapter 13 case with the local bankruptcy court, an automatic stay goes into effect which bars creditors from taking any collection actions against you. This applies to almost all debts, including mortgage debts. A debtor facing foreclosure can stop the process by filing for Chapter 13 protection -- even if the foreclosure is just days away from happening. The stay can last for the entire length of the case, usually three to five years, giving you protection during that entire period. Creditors can ask the bankruptcy court to lift the automatic stay by filing a motion for relief, but the success of such a motion depends on the facts of your case and your judge.
By providing relief from collection actions, a Chapter 13 case allows you to reorganize your debts and create a plan to repay them. Your repayment plan will include all mortgage payments that come due during the plan period, and it can also include past due mortgage payments, allowing you to catch up on what you owe your mortgage company. Since you can restructure your other debts under this plan, too, you may be able to decrease the amount you owe on your other debts. This can free up more money to pay your mortgage company to get your account current by the completion of your repayment plan.
Chapter 13 bankruptcy also offers options to modify your loans or mortgages to make them easier for you to pay. If you are trying to protect a vacation home or investment property for which the mortgage is higher than the property’s current value, you can ask the court for a “cram down” modification in which the court reduces the mortgage to the property’s current value, erasing the amount of debt that is higher than the property’s value. However, this protection is not available for property that is your principal residence as of the date you file your bankruptcy petition. Chapter 13 may allow the court to remove liens other than your first mortgage from your principal residence. This process, called lien stripping, applies if additional mortgages are wholly unsecured. For example, if you owe $110,000 on your first mortgage and $30,000 on a second mortgage but your home is only worth $100,000, the bankruptcy court can cancel your second mortgage. However, if your home was worth $115,000, your second mortgage could not be cancelled because a small portion of it is secured by the value of your home.
If you own your home with someone else, you may have a co-debtor or co-signer who did not file for bankruptcy but can still benefit from Chapter 13 protection. The automatic stay that goes into effect when you file your case protects your co-debtors, too; thereby, preventing collection actions against that co-debtor. This protection can be removed if the court decides to lift the automatic stay. However, while it is in place, your co-debtors do not have to worry about your lender coming after them for past-due payments. This may allow you to keep your home longer because you will not have added pressure from co-debtors who would otherwise be responsible to pay your share of the mortgage.