Bankruptcy protection is often used to stop foreclosure and provide the debtor with the opportunity to restructure mortgage arrears into affordable payment terms.

When borrowers fall behind on their mortgage, the bank generally insists on paying ALL past due mortgage arrears upfront, or in a very short period of time – two to three months. This financial situation is usually impossible for the debtor who wants to save his house.

The alternative to bankruptcy is Chapter 13 bankruptcy. Chapter 13 of the United States Bankruptcy Code allows the debtor the opportunity to restructure the payment of delinquent mortgage arrears within a period of three (3) to five (5) years. This makes the recovery of overdue mortgage payments affordable for the debtor.

Chapter 13 bankruptcy is commonly known as a “salaried” plan. The debtor is required to demonstrate to the Bankruptcy Court that he has sufficient recurring income or stable wages to manage the payment of a modest family budget and an adequate surplus of income that allows the debtor to pay the mortgage arrears in a period not to exceed five ( 5 years.

In some cases, mortgage arrears must be repaid with interest. However, this depends on the provisions set forth in the loan documents that govern the borrower’s loan.

Chapter 13 also allows debtors to restructure collateral advances made by the bank. If the debtor’s bank advanced the payment of real estate taxes, property insurance, etc., those advances can also be repaid during the term of the Chapter 13 plan, which will not exceed five (5) years.

As an example, let’s say the debtor’s mortgage payment is $ 1,200.00 per month and the debtor is 24 months behind on the mortgage, and the mortgage arrears total $ 28,800. The debtor’s bank has filed a foreclosure action and the bank is ready to auction the property.

When filing for Chapter 13 bankruptcy, all debt collection activity from creditors must cease, including bank foreclosure.

The debtor can now formulate a plan to pay the mortgage arrears into a payment plan that works within the debtor’s budget.

Upon filing for Chapter 13 Bankruptcy, the debtor must stay current on all his monthly bills arising AFTER the filing date of Chapter 13. Therefore, the debtor’s income must be sufficient to pay his ordinary living expenses ( mortgage, utilities, food, insurance, car payment, medical expenses, etc.) and, in addition, there must be enough excess income to pay the Chapter 13. payment plan, that is, the mortgage arrears. That means that the debtor must have excess income of at least $ 480.00 per month above and beyond their ordinary living expenses to pay the mortgage arrears for the next five (5) years. If this is affordable, the debtor can save their home under a Chapter 13 plan.

The Bankruptcy Court will also require the debtor to make a refund to unsecured creditors. Most courts require the debtor to reimburse unsecured creditors for at least 20% of outstanding unsecured claims. So, in addition to repayment of mortgage arrears, the debtor must be able to pay a dividend to the unsecured creditors. In our example, suppose the debtor has a credit card debt of $ 20,000. The Bankruptcy Court would expect our debtor to repay unsecured credit card claims at least $ 2,000.00 in a term not to exceed five ( 5 years. Therefore, the debtor’s income must be sufficient to pay his ordinary living expenses, mortgage arrears at a rate of $ 480.00 per month plus a dividend for general unsecured creditors of $ 33.33 per month. .

As long as the debtor can pay his ordinary living expenses and the Chapter 13 plan payment, he will be able to save his home under the protections afforded by Chapter 13 of the United States Bankruptcy Code.