Catching Up on Mortgage Payments Through Chapter 13 Bankruptcy

When you are several months behind on your mortgage and the lender is talking about foreclosure, it can feel like there is no way out. You know you cannot write a check for six or twelve months of missed payments all at once. But what if you could spread those missed payments out over three to five years and pay them back gradually while staying in your home? That is exactly what Chapter 13 bankruptcy allows you to do.

For many of the homeowners we work with in the Pittsburgh area, Chapter 13 is the tool that saves their home. Here is how the process works in practical terms.

How Chapter 13 Handles Your Mortgage Arrears

When you file Chapter 13, you propose a repayment plan that covers three to five years. Within that plan, your mortgage arrears, meaning all the payments you have missed plus any late fees and penalties, are included as a specific line item. You pay those arrears back in monthly installments through the plan.

At the same time, you are required to make your regular, ongoing mortgage payments directly to your lender starting the month after you file. So you are paying two things at once: your current mortgage payment and a portion of your arrears through the bankruptcy plan.

The beauty of this arrangement is that the lender cannot foreclose on you while you are making these payments. The automatic stay that goes into effect when you file stops all foreclosure activity. As long as you keep up with both your plan payments and your ongoing mortgage, your home is protected for the entire duration of the plan.

What Counts as Mortgage Arrears

Your arrears include more than just the missed principal and interest payments. They also include late fees, penalties, attorney fees that the lender incurred in the foreclosure process, and any escrow shortfalls for property taxes and insurance. All of these get rolled into the arrears amount that you pay back through the plan.

One of the advantages of having these costs paid through the bankruptcy plan is that the amount is fixed at the time of filing. Your lender cannot keep adding fees and charges while the plan is active. You know exactly what you owe, and you know exactly how long it will take to pay it off.

If your lender has charged excessive or improper fees, your bankruptcy attorney can challenge those amounts. The bankruptcy court has the authority to determine what is owed and what is not, which gives you a level of protection you would not have outside of bankruptcy.

Calculating Your Monthly Plan Payment

Your Chapter 13 plan payment is determined by several factors, including your income, your expenses, the amount of your mortgage arrears, and your other debts. The plan has to be feasible, meaning the court needs to be satisfied that you can actually afford to make the payments.

For example, if you are $12,000 behind on your mortgage and your plan lasts five years (60 months), the arrears portion of your payment would be about $200 per month. On top of that, your plan payment also covers a portion of your unsecured debts (credit cards, medical bills, etc.) and the trustee's administrative fee.

The good news is that in many Chapter 13 cases, unsecured creditors receive only a fraction of what they are owed. If you are behind on your mortgage because credit card payments and medical bills were consuming too much of your income, Chapter 13 reduces those obligations and redirects money toward keeping your house.

What Happens to Your Other Debts

One of the reasons Chapter 13 works so well for homeowners is that it addresses your entire financial picture, not just the mortgage. Credit card debts, personal loans, medical bills, and other unsecured obligations are consolidated into the plan. In many cases, you pay back only a percentage of those debts, sometimes as little as ten cents on the dollar, and the remainder is discharged when you complete the plan.

If you are also behind on a car payment, Chapter 13 can handle that too. Car loan arrears can be included in the plan, and in some cases, the loan balance can be reduced to the car's actual value (called a "cramdown") if the loan is old enough.

By the time you finish your plan, your mortgage is current, your unsecured debts are largely or entirely eliminated, and you are in a much stronger financial position than when you started. That is the fresh start that bankruptcy is designed to provide.

Requirements for Success

Chapter 13 is a powerful tool, but it does require commitment. You need regular income sufficient to fund your plan payments plus your ongoing mortgage. If your income is unstable or insufficient, the plan may not be feasible, and the court will not confirm it.

You also need to make every payment on time for the full duration of the plan. Missing plan payments can result in your case being dismissed, which would remove the automatic stay protection and allow your lender to resume foreclosure. If you hit a rough patch during the plan, your attorney can sometimes modify the plan to adjust the payments, but this requires court approval and is not guaranteed.

Before you file, you will need to complete a credit counseling course from an approved provider. This is a federal requirement for all bankruptcy filers and is usually completed online in about an hour. A second course, called debtor education, is required before you receive your discharge at the end of the case.

Getting Started

If you are behind on your mortgage and worried about foreclosure, the first step is to understand your options. Chapter 13 may be the right path, or there may be other alternatives worth considering, such as loan modification or a Chapter 7 filing combined with a voluntary sale. The right answer depends on your income, your equity, your arrears amount, and your long-term goals.

At Bryan P. Keenan & Associates, we handle Chapter 13 cases regularly and know how to structure plans that work. We will review your finances, calculate what your plan payment would look like, and give you a clear picture of what to expect. Our free consultations are designed to answer your questions so you can make an informed decision.