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How Chapter 13 Bankruptcy May Save Your Home

August 11, 2014

Alex Moretsky

December 12,2014

Evidence suggests that nearly all debtors filing Chapter 13 in Pennsylvania are homeowners wishing to save their homes. Filing a Chapter 13 bankruptcy is particularly helpful to people behind on their mortgage payments who need time to catch up on those payments, but cannot afford to pay the arrearage in a lump sum. Chapter 13 provides an opportunity to delay or prevent the foreclosure on your home and pay off back debt from future income. In some cases, second and third mortgages can be eliminated. It is an opportunity to adjust financial affairs without having to liquidate your assets.

Here is how it works. In Chapter 13 you restructure the debts with a repayment plan. When you file, you must abide by the terms of the plan for the duration, typically three to five years. At the end of the plan any remaining unsecured debts are discharged, meaning you no longer owe them. A debtor is responsible for any secured or unsecured debts incurred after the filing of the bankruptcy.

Advantages of Chapter 13 bankruptcy for a homeowner include:

  1. Stops and/or avoids foreclosure on the home
  2. Many homeowners are able to refinance the home before the expiration of the plan
  3. It allows the bankruptcy court to modify some debts secured by the property if the amount owed is greater than the value of the property

Also, you may be able to eliminate second and third mortgages on your home. If your first mortgage is secured by the entire value of your home, you no longer have equity to secure the junior mortgage(s). The bankruptcy court may “strip off” a second or third mortgage and re-categorize it as unsecured debt. This debt has last priority under Chapter 13 and is usually not paid in full and sometimes not at all.

It is important to keep in mind that you are protected only if you abide by the terms of the repayment plan. You need enough income to meet your current mortgage payments, plan payments (including mortgage arrearages divided by 36 to 60 months) and other basic expenses. However, if you are not able to live up to the terms of the plan due to temporary hardship or a financial emergency you may be able to work out an extension of the plan, provided it does not exceed five years. If your financial situation worsens you may ask for a modification of the plan.

Halting or delaying foreclosure is almost always automatic when you file Chapter 13. This is called the “Automatic Stay”. It allows you to remain in your home. If the repayment plan includes provisions for paying off the mortgage, then once approved by the bankruptcy court the mortgage company is bound by the plan and cannot continue with foreclosure.

There is an exception to the “Automatic Stay”. If you filed another bankruptcy in the last two years that was dismissed and the automatic stay was lifted by the party seeking the foreclosure in the previous bankruptcy, filing Chapter 13 may not halt foreclosure proceedings.

To discuss your particular situation and how chapter 13 may help you, speak with a Philadelphia, Pennsylvania area bankruptcy attorney.