Using Chapter 13 Bankruptcy to Obtain Mortgage Debt Relief

Many people in financial distress are behind on their home mortgages. Debtors who have missed payments are at risk of losing their homes to foreclosure. One of the most effective strategies for saving a home from foreclosure is a Chapter 13 bankruptcy.

This type of bankruptcy is also called a wage earner’s plan, because it allows debtors who have steady incomes to pay off a portion of their outstanding debt monthly over a protracted period of time, with the remainder then being discharged. However, repayment plans apply only to unsecured debts. By contrast, secured debts like home mortgages remain in force and must continue to be paid to avoid default and possible foreclosure.

How, then, can Chapter 13 bring mortgage debt relief? For one thing, any arrearage on the loan is considered unsecured debt and can be included in the repayment plan, which lasts three to five years. This gives the debtor the ability to focus on making regular loan payments going forward.

Homeowners who don’t have the resources to make regular mortgage payments can seek further relief by proposing a mortgage loan modification. The mortgage holder may be receptive to the new arrangement because the alternative could be a default and the need to bring a foreclosure proceeding. A loan modification involves negotiating one or more of the following:

• Extending the loan payment period for years beyond the original contract term
• Lowering the interest rate
• Rolling the arrearage into a loan payable over several years, beyond the plan’s three or five years
• Reducing outstanding penalties and late fees

Homeowners can attempt to renegotiate a home loan without filing for bankruptcy. However, there are certain advantages to filing a Chapter 13 before seeking modification. Upon the filing of the petition, all creditors are subject to the automatic stay. While the stay is in effect, lenders are legally prohibited from trying to collect any outstanding debts and from foreclosing on liens or seizing assets. The stay can last for months. A lender subject to the automatic stay thus might be more inclined to negotiate.

Still another form of mortgage relief during Chapter 13 is through a “strip down” of second or third mortgages on a home. A debtor’s home may be worth much less than the total of the outstanding mortgage loans. If the value drops to the point that it would pay only part of the first mortgage, any second or third mortgage liens can be cancelled by court order. These loans become unsecured, which means they will be partially repaid under the Chapter 13 plan and the remainder will be discharged.

Jeff Field & Associates assists homeowners in debt relief from six locations in the Atlanta, Marietta and Athens areas of Georgia. Contact us online or call 404-381-1278 for a free initial consultation.