Chapter 13 prior to Mortgage and Property Tax Foreclosure

Chapter 13 can stop mortgage and property tax foreclosures and provide up to five years to catch up on both.

mortgage and tax foreclosure
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Unpaid Property Tax Means You’re in Breach of Your Mortgage Contract

Just about every mortgage agreement obligates you to keep current on your home’s property taxes. Most even consider falling behind on property taxes a breach of the mortgage agreement and grounds for the mortgage lender to foreclose on your home.

Your mortgage lender takes the property taxes so seriously because property taxes sit in higher priority than the lender’s mortgage. That means the lender risks financial losses if the county forcloses on the property because of the property taxes.

When you are behind on your property taxes, you are also typically behind on your mortgage payments. If you want to keep your home, you have to address both at the same time. That’s hard to do unless you have some help. Chapter 13 “adjustment of debts” bankruptcy may be your solution.

The “Automatic Stay” Stops Tax and Mortgage Foreclosures

Chapter 13 can help by stopping any pending foreclosure of your home. The foreclosure’s halting is crucial because it is sometimes too late to fix the problem once a foreclosure happens. Filing a Chapter 13 and the “automatic stay” it imposes will immediately stop a foreclosure from happening.

Enough Time to Pay the Back Property Taxes

After stopping a pending foreclosure, you need to buy some time so you can fix your financial issues. If you want to keep your home but have fallen behind on your mortgage and property tax payments (by not paying into the escrow or by not paying the taxes directly), you need a tool that will give you time to catch up on your payments.

Most people need a long time through a restructured payment process to catch up on mortgage and tax payments. But some people are lucky and have access to the large sum of money that is usually needed to bring the mortgage and property taxes current. Others are even luckier to find that the mortgage lender is willing to re-write and modify the mortgage altogether.

Chapter 13 provides up to five years to catch up on your mortgage and tax arrearages. Although Chapter 13 can last anywhere from three to five years, in most cases, you can go the entire five years, if needed, to keep the monthly catch-up payments as low as possible.

The “Automatic Stay” Prevents Upcoming Foreclosures

A Chapter 7 “straight bankruptcy” will also stop a foreclosure. But the “automatic stay” in Chapter 7 almost always lasts only about three months. A mortgage lender can wait that time out or file a Motion for Relief from the Automatic Stay (if specific facts are evident), which will allow the lender to resume its previously stopped foreclosure or start a new one.

But with Chapter 13, the “automatic stay” usually lasts the length of the case. A mortgage lender or county/property tax agency can ask the bankruptcy court for “relief from the automatic stay.” But that “relief” is usually granted to the lender only if the homeowner fails to perform according to the Chapter 13 payment plan. Otherwise, the creditor must wait for you to get caught up over time. Under Chapter 13, you have peace of mind knowing that a foreclosure will not begin.

The Example

As a result of many months of unemployment, Jerry and Jane fell a year behind on their home mortgage. Their monthly payments were $1,500, totaling $18,000 for the year. They also failed to pay the additional $200 per month into their escrow account to pay their property taxes and homeowner’s insurance. As a result, when it came time for their mortgage lender to pay their property taxes out of their escrow account, there was no money to pay that year’s $2,000 property tax. At that point, their mortgage lender started a foreclosure. The lender cited the lack of both mortgage and escrow payments as the reason for the foreclosure. Jane and Jerry also received notice from their county threatening a tax foreclosure for nonpayment of the property taxes.

After getting legal advice from their Kalispell Bankruptcy Attorney, Jerry and Jane decided that saving their home was worthwhile for both economic and personal reasons. With the help of their attorney, they filed a Chapter 13 bankruptcy. Their budget showed that with both of them back at work with full-time jobs, they could now afford to pay the $1,500 monthly payment for the mortgage itself, plus an additional $200 for the escrow payment for future property taxes and insurance. They could also afford to pay $400 per month into their Chapter 13 plan, which would pay off their $18,000 mortgage arrearage and their $2,000 property tax arrearage over five years. Throughout those five years, Chapter 13 protected Jane and Jerry from being foreclosed on by the mortgage lender or the county. When they finished Chapter 13, they were current on their mortgage and property taxes and otherwise debt-free.

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