Suppose I haven’t made my mortgage payments for a long time: Can a bankruptcy help me to keep my house?

Most of my clients desperately want to keep their homes, even if the payments are very burdensome on their incomes.  Most people are strongly attached to the house where they are raising their families, their neighborhood where their kids go to school, and their place of shelter from the outside world.  I understand that.  I feel the same way about my home.  On the other hand, sometimes life makes it hard enough to just keep food on the table, clothes on the kids, and utilities running.  You may have medical bills due to an injury or illness, or you may have recently become divorced.  You may be trying to get by on less money because your work hours were cut, or you might have your own business that’s struggling. For reasons you could not have predicted, you find yourself going month after month without any money left over to pay your mortgage.  You have what’s referred to as an “arrearage”, meaning you owe for one or more months in addition to your normal monthly mortgage payment.  There are ways in which a bankruptcy, either a 7 or 13, can help keep you and your family in your home.

When you meet with me initially, we will discuss how a bankruptcy can actually help your individual situation to bring your mortgage current and keep you in the home.

You have likely heard of government programs to help homeowners who are struggling with their mortgage payments.  The Making Home Affordable Program (“MHA”) was created to help you avoid losing your home to foreclosure, either by lowering your mortgage payments or by helping you to refinance when private mortgage companies have turned you down.  Application for approval under the MHA programs, such as HAMP and HARP, involves filling out and submitting forms, and providing a lot of documents detailing your income and expenses.  You generally work through your mortgage lender to apply.  You may be required to make several months of “trial payments” before you can be approved. Thus, there is a lot of time and effort involved on your part in even making the application.  Unfortunately, it is almost routine that the mortgage lender will claim to have never received the paperwork, and you have to re-submit it.  One would expect that over the years the MHA has been in effect, the lenders would have improved their systems so that this lost paperwork wouldn’t occur so often.  However, it’s almost to be expected that you will receive notice that your paperwork wasn’t received or that it was incomplete.  Therefore, it usually takes several months to find out whether or not your application will be accepted.

The bankruptcy courts approve of you getting assistance from a MHA program.  They won’t penalize you for that if you do so before or during your bankruptcy.

A bankruptcy filing could be a valuable way for your to get your financial health back in addition to the mortgage assistance, either in a Chapter 7 or a Chapter 13.  Let’s look at some of the ways filing could help:

Chapter 7

The chief benefit of filing a Chapter 7 bankruptcy when you have a mortgage arrearage would be to get rid of other debts that might make it difficult for you to come up with your mortgage payment each month.  If you have significant credit card debt, past due utilities, doctor and hospital bills, you can discharge those in a Chapter 7, while electing to keep paying your mortgage and keeping your home.

The disadvantage under Chapter 7 is that the mortgage generally has to be brought current by the time the bankruptcy discharges.  Therefore, if you have a large mortgage arrearage, the 7 might not serve your purposes.  It generally works where the amount of the arrearage makes it possible for family to lend you the money, or you can get the money out of your retirement, or where there is a MHA application in process in which the lender is encouraging that in the end it will be approved.

One sidelight that you probably know, is that the filing of a bankruptcy stops a foreclosure action that has been filed by the lender, at least until the lender can get permission from the bankruptcy court to reinstate it in the county common pleas court.  This could buy you an extra month or so to get the money to pay the arrearage.  I’m not totally pleased with using a Chapter 7 to buy time because I think it just puts a band aid on a bigger financial problem, but in truth, that’s what filing a 7 would do.

Chapter 13

I generally suggest that my clients are better off in a Chapter 13 bankruptcy than a 7 for dealing with a mortgage arrearage.  Basically, it allows you to pay off the arrearage over the length of your bankruptcy rather than bring that arrearage current in a couple months.  Being in a bankruptcy prevents the mortgage lender from filing a foreclosure action during that time.  Keep in mind that the mortgage lender cannot refuse to take the payments if you propose a Plan for paying the arrearage and the current mortgage payments in good faith.  And, if you do eventually get approved for a FMA plan during the course of the bankruptcy, the Chapter 13 Trustee will modify your Plan to take that modification into account.

Obviously, you must have the income necessary to pay off the arrearage within the Plan period (36 or 60 months) and be able to pay the current mortgage payments as they become due.  These payments are included in your Plan and go through the Trustee, who pays them out to the mortgage lender.

In a Chapter 13, your unsecured creditors (those that don’t have collateral for their debts) are paid some percentage of their balances due on the date we file.  That percentage can be 0% to 100%, and anywhere in-between.  Therefore, the 13 may also help you deal with these other debts (credit cards, utilities, medical bills) by lowering the amount you will be paying them, and leaving you with more income to pay toward the mortgage.  At the end of your bankruptcy, the mortgage arrearage will be paid in full, and the unpaid balances to your unsecured creditors will be wiped out through the discharge.

One additional, and usually unintended, benefit of going through a Chapter 13 bankruptcy is that it teaches you to budget your funds so that you can make your monthly Plan payments to the Trustee.  Hopefully, this organization of your income will outlive the bankruptcy, and put you on a financial track to continue with your timely mortgage payments once you’ve completed your Plan and the bankruptcy is discharged.

About Barbara Horwitz

Barbara Horwitz is an experienced bankruptcy attorney helping people get past financial difficulties. She believes in creating a relationship with clients and is dedicated to making the bankruptcy process as easy and stress-free for clients.

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