Chapter 7 provides no mechanism to cure your mortgage. But Chapter 13 provides a powerful, realistic, and practical way to do so.
Chapter 7 “Straight Bankruptcy” and Chapter 13 “Adjustment of Debts”
Chapter 7 and Chapter 13 are the two main consumer bankruptcy options.
We have discussed how both Chapter 7 and Chapter 13 bankruptcies allow you to gain power over your home mortgage. Most Chapter 7 cases only take a few months—usually three to four months—from filing to completion. A Chapter 13 case usually takes 3 to 5 years. At first, this extra length of time may seem like a disadvantage. However, Chapter 13 puts this time to good use, accomplishing things that you can’t under Chapter 7.
Essentially, Chapter 13 gives you the 3-to-5-year period to cure your mortgage while protecting your home throughout that time.
Chapter 7 Shortcomings For Curing Your Mortgage
Chapter 7 leaves you at the mercy of your mortgage lender if you’re behind on the mortgage.
Chapter 7 protects you from the lender for only the four months or so that it lasts. (The protection might even be shorter if the lender asks the bankruptcy court for permission to end the protection sooner.) During that time, you may be able to work out a “forbearance agreement” with your lender. This agreement nails down the terms for curing your mortgage.
The problem is that you have precious little leverage in this negotiation. If you are not too far behind on your mortgage, your lender may give you a few months, maybe up to a year, to catch up. But the lender has all the leverage, and you have almost none. The bank can begin or resume a foreclosure as soon as your Chapter 7 case is over. With that leverage, it can make you try to catch up unrealistically fast, requiring huge catch-up payments each month. The catch-up payments increase the likelihood that you won’t succeed in always making the required payments. And at best, if you do make those large payments and do catch up, it’ll be a tough and risky experience.
Chapter 13 Solution For Curing Your Mortgage
In contrast, as mentioned above, Chapter 13 gives you much more time and protects your home in the meantime.
Instead of the bank imposing a catch-up payment on you, your realistic personal budget determines the amount. The payments can be stretched out over as much as five years. You may even be able to delay or lessen these catch-up payments if you have other even more urgent debts to pay. Also, if your circumstances change midstream, you’d likely be able to adjust the payment amounts.
These and other advantages effectively lower the catch-up payments, making it more likely that you’ll successfully cure the mortgage and keep your home.
Doing Your Part
You can quickly lose the multi-year protection of Chapter 13 if you don’t fulfill some essential obligations. To maintain the protection you have to:
1. Keep current on your court-approved Chapter 13 payment plan. A single monthly payment incorporates your catch-up payments and virtually all your debts. Not paying this to the Chapter 13 trustee each month gives your mortgage lender cause to ask permission to foreclose. It also provides justification for your case to be thrown out altogether.
2. Keep current on the regular monthly mortgage payments. Chapter 13 gives you the means to slowly cure your arrearage. Your case is seriously jeopardized as you fall further behind in your payments.
3. Pay your homeowner’s insurance on time. Don’t let your insurance lapse. That scares your mortgage lender (and should scare you, too). Your lender would likely “force-place” its insurance (which protects it but not you). It would then make you pay the exorbitant cost of this insurance, putting you that much further behind. The failure to ensure the property is also an independent basis for it to ask permission to foreclose.
4. Pay property taxes. Falling behind on property taxes also gives the mortgage holder a separate basis for requesting the bankruptcy court for permission to foreclose. The budget you work out with your bankruptcy lawyer will include money for these taxes, to prevent this from happening.