You Are Here: home > Blog > homeowners

Putting a Stop, at Least Temporarily, to Your Home’s Foreclosure

Posted by Kevin on October 29, 2019 under Bankruptcy Blog | Be the First to Comment

Both Chapter 7 and Chapter 13 will stop a foreclosure.

The Bankruptcy Code says that a bankruptcy “petition filed… operates as a stay, applicable to all entities, of—…  any act to… enforce [any lien] against any property of the debtor…  .” See Section 362(a)(4). This means that the mere filing of your bankruptcy case will immediately stop a foreclosure from happening.

But What if the Foreclosure Still Occurs?

But what if your bankruptcy case is filed just hours or even minutes before the foreclosure sale, but the foreclosing mortgage lender or its attorney can’t be contacted in time for them to be informed? Or what the lender is contacted in time but messes up on its instructions to its foreclosing attorney so that the foreclosure sale mistakenly still takes place? Or what if the lender refuses to acknowledge the effect of the bankruptcy filing and deliberately forecloses anyway?

As long as the bankruptcy is in fact filed at the bankruptcy court BEFORE the foreclosure is conducted, the foreclosure would not be legal. Or at least would very, very likely be immediately undone. It does not matter whether the foreclosure happened mistakenly or intentionally.

A Foreclosure by Mistake

If a foreclosure happens by mistake after a bankruptcy is filed, or because the lender didn’t find out in time, lenders are usually very cooperative in quickly undoing the effect of the foreclosure. It is usually not difficult to establish that the foreclosure occurred after the bankruptcy was filed, and that usually quickly resolves the issue. If a lender fails to undo such a foreclosure after being presented evidence that the bankruptcy was filed first, the lender would be in ongoing violation of the automatic stay. This would make the lender liable for significant financial penalties, so they usually undo the foreclosure right away.

A Foreclosure Purposely Conducted after Your Bankruptcy is Filed

This almost never happens. If you are harmed by a foreclosure intentionally done after your bankruptcy filing, you can “recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” See Section 362(k). Bankruptcy judges are not happy with creditors who purposely violate the law. Enough of them have been slapped that most creditors know better.

Chapter 7 vs. Chapter 13

For purposes of stopping a foreclosure that is about to happen, it does not matter whether you file a Chapter 7 or Chapter 13 case. The automatic stay is the same under both.

But how long the protection of the automatic stay lasts can most certainly depend on whether you file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.” That’s because even though you get the same automatic stay, each Chapter gives you very different tools for dealing with your mortgage. That’s why your mortgage lender will likely react differently depending on which Chapter you file under and how you propose to deal with the mortgage within each.

“Converting” Your Chapter 13 Case into a Chapter 7

Posted by Kevin on April 4, 2014 under Bankruptcy Blog | Comments are off for this article

To qualify for Chapter 13, you must be an “individual with regular income, meaning that your income is sufficiently stable and regular to enable you to make payments under a Chapter 13 plan. That requirement of a “stable and regular” income means not only at the time of filing, but for the entire duration of the plan (36 to 60 months).  In a way, every Chapter 13 is a leap in faith that the debtor’s financial situation will be stable (or better) through the duration of the plan.  Of course, life throws you curve balls.  You lose a job, or your hours are cut.  You or a member of your family gets sick and insurance does not cover the whole bill.  The car breaks down-more than once.  Your wife has to quit her job to take care of her sick mother.  Whatever.  The Code takes this into account.  How?   One way  is by allowing you to convert your Chapter 13 to a Chapter 7.

Here’s an example to illustrate this.  You own a home and have two mortgages.  You are  $5,000 behind in payments on your first mortgage (balance $250,000) and cannot remember when you last paid the second (balance of $75,000). You owe $25,000 in credit card bills, and another $10,000 in medical expenses that the insurance did not cover.   The home is worth a  less than the first mortgage.  You had been laid off, but got a new job, and are starting to get significant overtime.  But now, almost miraculously the debt collectors are calling again.  You are making enough to take care of that first mortgage, your current expenses, and  if everyone tightens belts,  a little more, say $250 per month.

Chapter 13 may be the answer.  How, you say.  Even if everything goes right, what am I going to do about that second mortgage?  Chapter 13 gives you the power to “strip” the second mortgage; that  is, convert the second mortgage secured debt into unsecured debt.  Then, the second mortgage gets paid pro rata with the credit cards and medical bills.  How much?  What ever is left over after paying your current monthly bills, your first mortgage arrearages, and the fee to your lawyer and the trustee.  Could be very little.  Plus the “second mortgage strip” also lowers the debt against the home by the amount of that second mortgage, bringing the debt down closer to the home’s market value.  Seems to satisfy both your short term and long term goals. Chapter 13 looks good, so you file under that chapter.   You know it is going to be a bit of a stretch, but if the stars line up right, you get to keep your home and discharge your debts.

15 months into the plan, your boss cuts back on most of your overtime.  You can’t even pay the first mortgage  much less the trustee.  If the case is dismissed, there is no more automatic stay so your creditors will come after you because you now have wages that can be garnished.  What to do?

The Bankruptcy Code explicitly states in that a Chapter 13 debtor may convert a case under this chapter to a case under chapter 7 at any time. Any waiver of the right to convert under this subsection is unenforceable.

Not a perfect solution, by any means.  However, better than being thrown to the wolves.  Let’s look at the scenario under the converted Chapter 7.  First, you do not have to make any more payments to the trustee.  That comes out to $3000 per year.  Second, your Chapter 7 case is over in about 3 months and you most probably get a discharge.  That means that you have knocked out all your debts (mortgage, credit card and medical).

BUT, the Code differentiates between the debt and the security for the debt.  The debt is discharged but the security (mortgage) remains on the property.   Unless you can make a deal with the mortgagees, you will probably lose your home.  But you will not owe any deficiency on the first mortgage or anything on the second.  Moreover, you will knock out the credit card and medical debt.

Now, if you work with experienced bankruptcy counsel, he or she will lay out this scenario in a way that you know or should know that you are taking a “shot”  to save your home.  If it works, God bless.  If not, you switch into a 7, get your discharge and move on with your life.

So conversion to Chapter 7 can be a decent result when the goals of Chapter 13 cannot be met, either because of unexpected circumstances or because the debtors took some calculated risks which did not go their way.

The Nitty-Gritty about Catching Up on Your Mortgage through Chapter 13–Part 2

Posted by Kevin on August 7, 2013 under Bankruptcy Blog | Be the First to Comment

More answers about how Chapter 13 gives you up to 5 years to catch up on your past-due mortgage.

The last blog, and this one, answer questions about how Chapter 13 gives you time to “cure the arrearage.” Check out the last blog for answers to these questions:

  • Can you give a simple example how this “curing the arrearage” works?
  • If my Chapter 13 plan proposes to catch up my mortgage in 5 years, does my mortgage lender have to go along with this?
  • What if, based on my income, I’m allowed to finish my plan in 3 years instead of 5?

Now on to today’s questions:

How are back property taxes handled?

If you are paying your home’s property taxes as part of your mortgage payment, and you’ve fallen significantly behind on those mortgage payments, the lender may well have paid the current year’s property taxes with its own money. If so, the lender will add the amount it advanced for your taxes into the total amount that you are behind. So through your Chapter 13 plan payments you will simply pay to your lender the amount that it paid for your taxes, as you pay the rest of your back mortgage payments.

If you are paying the property taxes directly (not as part of your regular mortgage payments) and have fallen behind on those taxes, your Chapter 13 plan will include payments to the county or other appropriate taxing authority.

What if the mortgage lender and I don’t agree on the amount of arrearage that’s owed?

Chapter 13 has a relatively efficient mechanism for determining the accurate amount of arrearage. Your creditors, including your mortgage lender, are required to file a document in  bankruptcy court—a “proof of claim”—stating the total amount owned, the amount of arrearage and how it is calculated, as well as the amount of any additional fees. You as the debtor then have the opportunity to object to that proof of claim. The bankruptcy judge is a convenient and experienced decision-maker in these kinds of disputes.

This area has been a controversial one in the past 5-10 years, mostly because lenders have often been inaccurate and unclear in their accounting, and been simply unable to justify the amounts on their proofs of claim. This particularly became a problem when lenders added fees to the balance without telling the homeowners, so that the homeowners would think that they were current only to learn, often after the completion of their Chapter 13 case, that supposedly they were still behind. Bankruptcy Rule 3002.1 was put into place to solve this problem. This rule requires lenders to give timely notice of the amount owed and any changes to the amount, and provides for serious consequences if they fail to follow these rules.

What happens if my circumstances change and I decide not to keep the house after all during my Chapter 13 case?

One of the great features of Chapter 13 is its flexibility. So you CAN change your mind and surrender your house part-way through your case. Or you can sell it.  And at that point you can either stay in the Chapter 13 case or get out of it.

You could stay in it if there were still worthwhile reasons to do so, reasons not related to your house. For example, you could continue the case if you had debts that were best handled in a Chapter 13 case—such as taxes, support obligations, or possibly student loans. Your attorney would work with you to amend your plan to stop payments going to the house and redirect them elsewhere.

But if you filed a Chapter 13 case solely because of your house and now no longer needed or wanted to catch up on the arrearage, your attorney could either “convert” your case into a Chapter 7 one or simply end the Chapter 13 case by “dismissing” it. More likely your case would be converted into a Chapter 7 one to finish taking care of your debts, including possibly debts related to your house.

A big caution comes with all this flexibility. Although it’s good to know when you start your Chapter 13 case that it does not HAVE to be completed as it was originally put together, it seldom makes practical sense to start a case that you don’t intend to finish. You need to have a reasonable chance to complete it. Consider very carefully whether you will be able to make the necessary payments over the whole 3-to-5-year length of your case. If you had trouble making your regular mortgage payment before filing bankruptcy, look at whether Chapter 13, with all of its benefits, will help your cash flow enough so that you will be able to do what the plan requires of you.

The Costs and Benefits of Surrendering Collateral in Chapter 13

Posted by Kevin on June 25, 2013 under Bankruptcy Blog | Be the First to Comment

The Simple Surrender

If you’ve decided to surrender your home, vehicle, or any other collateral that you no longer need or want to pay for, filing a Chapter 7 “straight bankruptcy” is usually the cleanest way to go. The remaining debt on the home is mostly either discharged (legally written off)—including 2nd mortgages, judgments, utilities—or is paid off by the mortgage holder after taking back the real estate—such as property taxes and homeowner association dues.  On your vehicle loan, the often large “deficiency balance”—the amount you would owe after the creditor sells the vehicle and applies the sale proceeds to the loan balance—is discharged. You give up the collateral but you are quickly free of the debt.

The Possible Delayed Surrender

If you wanted to keep the property, Chapter 13 allows for that.  But what if you know that your job may not last for more than another year, so you’re sensibly facing the reality that at that point you would likely not be able to continue making payments on the home or vehicle?  Once again, Chapter 13 is the way to go.  It allows you to make usually reduced payments while you have your job so you can keep the home or vehicle.  Then, if you lose your job, you can convert to Chapter 7, surrender the property and have the debt discharged.  Clearly, Chapter 13 gives you a lot a flexibility under these scenarios.

Flexibility at a Price

But, as with most things in life, there is a cost factor for this flexibility.  Chapter 13 costs more in fees than Chapter 7, easily twice the cost, or more. The attorney fees are much higher because it is more work over a longer period of time.  Plus the Chapter 13 trustee receives a percentage of what you pay to the creditors. Yes, you may save some money to retain the property in Chapter 13 as opposed to what the regular payment would be; however,  those savings you may be partially or even fully offset by these higher fees.

Chapter 13 Amps Up Power of the “Automatic Stay”

Posted by Kevin on May 29, 2013 under Bankruptcy Blog | Be the First to Comment

If Chapter 7 strengthens your hand against your secured creditors, Chapter 13 turns you into Superman.  It starts with a much more robust “automatic stay.”

The last blog explained how filing a Chapter 7 “straight bankruptcy” gives you certain leverage over secured creditors.  In each of these areas, the Chapter 13 “payment plan” gives you many more powers to achieve your goals. Because there are so many Chapter 13 powers, these three areas will be covered in the next few blogs.

Stopping Creditors from Taking the Collateral

The “automatic stay,” which immediately stops your secured creditors from taking any action against the collateral under Chapter 7, gives you that same benefit under Chapter 13. But the “automatic stay” can be tremendously stronger in Chapter 13 for three reasons:

1. Lasts So Much Longer: Chapter 7’s “automatic stay” generally lasts only about 3 months, and sometimes not even that long if a creditor asks the court for “relief from stay” to get permission to go after the collateral. At best, Chapter 7 only pauses the action against you and the collateral. In contrast, a Chapter 13 case itself lasts usually 3 to 5 years, and the protection of the “automatic stay” is in effect that entire time, again unless a creditor is successful in getting “relief from stay.” (usually because the debtor fails to make make multiple payments to that creditor).

2. The “Co-Debtor Stay”: A Chapter 7 case does not stop a creditor from pursuing any co-signer you may have or that co-signer’s collateral. Chapter 13 does. There are limitations to this special kind of “stay,” so how much practical help it provides to you depends on the facts of each case. But at the very least the co-debtor stay immediately protects the co-signer, giving you a chance to get your Chapter 13 plan started and to see whether and/or how the creditor reacts.

As with the usual “automatic stay,” an affected creditor can ask for “relief from the co-debtor stay” to get permission to go after the co-signer or its collateral. Unless and until this motion is filed and the bankruptcy court decides to give this permission, your co-signer is protected.

3. Enables the Other Chapter 13 Powers to Work: Chapter 13 gives you many strong powers for dealing with secured creditors, many of which only work because of the long and continuous protection provided by the “automatic stay.” For example, unlike Chapter 7 which provides no mechanism for catching up on unpaid mortgage payments (other than whatever payment schedule the creditor voluntarily agrees to), Chapter 13 effectively gives you the entire length of the 3-to-5-year case to catch up. But this only works because throughout this time the mortgage holder is stopped from foreclosing by the ongoing “automatic stay.”

Another example illustrates well the crucial role of the “automatic stay” in Chapter 13. Most mortgage documents require the homeowner to pay the home’s property taxes either directly to the taxing authority or more often through an escrow account set up for that purpose. If the taxes are not paid by the homeowner, that is a separate violation of the mortgage agreement and separate grounds for the creditor to start a foreclosure against the homeowner. When the homeowner files a Chapter 13 case, this stops BOTH the mortgage creditor’s foreclosure AND any present or upcoming tax foreclosure by the county (or applicable taxing authority). The homeowner’s Chapter 13 plan shows how the back payments to both the creditor and the taxing authority will be paid.  As long as you abide by the Plan, the automatic stays continues in effect, and the taxing authority cannot foreclose.

What Makes Your Bankruptcy Simple, and Not So Simple?

Posted by Kevin on May 5, 2013 under Bankruptcy Blog | Be the First to Comment

If your financial life is legally simple, your bankruptcy will likely be simple. What is it about your financial life that makes for a not so simple bankruptcy case?

Bankruptcy can be very flexible. If your finances are complicated, bankruptcy likely has a decent way to deal with all the messes. As in life, sometimes there are trade-offs and important choices to be made. But usually, whether your life is straightforward or complex, bankruptcy can adjust.

To demonstrate this in a practical way, here are some differences between a simple and not so simple bankruptcy case.

1. No non-exempt assets vs. owning non-exempt assets: In the vast majority of Chapter 7 and Chapter 13 cases, you get to keep everything that you own. But even if you do own assets that are not protected (“non-exempt”), there are usually decent ways of holding on to them even within Chapter 7, and if necessary by filing a Chapter 13 to do so.

2. Under median income vs. over median income: If your income is below a certain amount for your state and family size, you have the freedom to file either Chapter 7 or 13. But even if you are above that amount, you still may be able to file under either Chapter, depending on a series of other calculations. Again, Chapter 13 is there if necessary, and sometimes that may be the better choice anyway.

3. Not behind on real estate mortgage vs. you are behind: If you don’t have a home mortgage or are current on it, that makes for a simpler case. But bankruptcy has many ways to help you save your house. Sometimes that can be done through Chapter 7, although Chapter 13 has a whole chest full of good tools if Chapter 7 doesn’t help you enough.

4. No debts with collateral vs. have such debts: The utterly simplest cases have no secured debts, that is, those with collateral that the creditor has rights to. But most people have some secured debt. Both Chapter 7 and 13 have various ways to help you with these debts, whether you want to surrender the collateral or instead need to keep it.

5. No income tax debt/student loans/child or spousal support arrearage vs. have these debts: Bankruptcy treats certain special kinds of debts in ways that are more favorable for those creditors, so life is easier in bankruptcy if you don’t have any of them. But if you do, you might be surprised how sometimes you have more power over these otherwise favored creditors than you think. You can write off or at least reduce some taxes in either Chapter 7 or 13, stop collections for back support through Chapter 13, and in certain circumstances gain some temporary or permanent advantages over student loans.

6. No challenge expected by a creditor to the discharge of its debt vs. expecting a challenge: In most cases, no creditors raise challenges to your ability to write off their debts. Even when they threaten to do so, they often don’t within the short timeframe they must do so. But if a creditor does raise a challenge, bankruptcy procedures can resolve these kinds of disputes relatively efficiently.

7. Never filed bankruptcy vs. filed prior bankruptcy: Actually, if you filed a prior bankruptcy, or even more than one, it may well make no difference whatsoever. But depending on the exact timing, a prior bankruptcy filing can not only limit which Chapter you can file under, it can even sometimes affect how much protection you get from your creditors under your new case.

We’ll dig into some of these differences in upcoming blogs. In the meantime remember that even though your financial life may seem messy in a bunch of ways, there’s a good chance that bankruptcy can clean it up and tie up those loose ends. It’s called a fresh start.

The Nitty-Gritty about Catching Up on Your Mortgage through Chapter 13–Part 1

Posted by Kevin on August 2, 0201 under Bankruptcy Blog | Be the First to Comment

Chapter 13 gives you up to 5 years to catch up on your past-due mortgage. How does this actually work?

You get a bunch of tools to help you keep your home when you file a Chapter 13. But the most basic of those tools is this large chunk of time—up to 5 years—to “cure the arrearage.” If you are many thousands of dollars behind on your home mortgage, you need to fully understand how this tool works before investing a lot of time and money doing a Chapter 13 case. This blog, and the next one, should answer your most pressing questions about this.

Can you give a simple example how this works?

Let’s say your monthly mortgage payment is $1,500 and you’ve missed 10 payments, so you are $15,000 behind. If this $15,000 were paid over the full 60 months of a 5-year Chapter 13 plan, that would be $250 each month. ($15,000 divided by 60 = $250.)

If you filed a Chapter 7 case instead, you’d likely be given about 10 months or so to pay that arrearage—amounting to about an extra $1,500 per month. So you’d essentially have to pay double payments, impossible for most people. An extra $250 per month through Chapter 13 may seem hard enough, but this would almost always come with the elimination or significant reduction in what you are paying to other creditors.

(To keep the above calculation simple here, we’ve not included any other fees that could be added to the mortgage arrearage. In most cases the lender would be able to add some late charges, maybe its attorney fees, and perhaps some other costs. And the Chapter 13 trustee would also be entitled to a fee as well.)

If my Chapter 13 plan proposes to catch up my mortgage in 5 years does my mortgage lender have to go along with this?

Most of the time, yes. Although the lender may be able to attach conditions in its favor.

To use the above example, the lender would almost always have to accept the $250 per month arrangement, and give you an opportunity to make those payments under your Chapter 13 plan. But if the mortgage lender is aggressive, it may be able to impose some conditions, ones that are potentially dangerous for you. For example, the lender could require conditions stating what would happen if you failed to comply precisely with the plan’s payment terms—by not being on time with either the arrearage payment or the regular monthly mortgage payment. If you did not make these payments on time, you could be given a very short last chance to pay them or else the lender would be able to start (or re-start) foreclosure proceedings.

Another way of putting this—Chapter 13 gives you a relatively long time to catch up on your missed mortgage payments, but the system is not particularly patient with you if you are then not able to keep to that payment schedule.

What if, based on my income, I’m allowed to finish my plan in 3 years instead of 5?

You’re certainly not required to use the full 5 years, if you can pay off the arrearage and the rest of your Chapter 13 obligations (such as any taxes or back support) faster. Using the above example, $15,000 in missed mortgage payments spread over 36 months would require about $417 per month (again, excluding some likely extra fees), instead of $250. Generally, you would want to finish your Chapter 13 case faster if possible, but should keep your monthly payment low enough to make more likely that you will be able to complete it successfully. If your income qualifies you for a 3 year plan, you are generally allowed to have in a plan that lasts anywhere between 36 and 60 months, depending on what your budget allows.

The next blog will cover these remaining questions:

How are back property taxes handled?

What if the mortgage lender and I don’t agree on the amount of arrearage that’s owed?

What happens if my circumstances change and I decide not to keep the house after all during my Chapter 13 case?