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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.

Power to Protect Your Home Against Your Mortgage Lender and Lienholders

Posted by Kevin on June 17, 2013 under Bankruptcy Blog | Be the First to Comment

If you want to hold onto your home, Chapter 13 gives you many extraordinary advantages.

A. If you are current on your mortgage: In most situations you will be allowed to keep making payments directly to your mortgage holder. The bankruptcy system puts a high priority on home mortgages, so almost always your Chapter 13 plan will be structured to pay your mortgage ahead of most other creditors.

B. If you are behind on your mortgage: You will likely have the whole 3-to-5-year length of your Chapter 13 case to catch up on your missed payments. Although theoretically you want to finish your case sooner than later, from a practical perspective the longer you have to catch up the less it will cost each month to do so. In fact because of this, homeowners often intentionally stay in their cases longer than their income requires just to make it easier on their monthly budget.

C. If you have a second mortgage: We may be able to “strip” that mortgage off your house, so that you won’t have to pay it. This is possible only if the home is worth no more than the balance owed on the first mortgage. And this can only be done in Chapter 13, not Chapter 7. Note that when the second (or third) mortgage is stripped off your title, you will be that much closer to eventually building some equity in your home

D. If you are behind on homeowner association dues: These special creditors usually have very aggressive collection methods available to them. But Chapter 13 can stop them and keep them at bay while you get current through payments earmarked to them through your plan.

E. If you are behind on your property taxes: Same thing. The county or other property tax agency is put on hold with any tax foreclosure or other collection procedures while the back taxes are paid through your Chapter 13 plan. Your mortgage company also sees that you are taking care of this responsibility and can monitor your performance in doing so.

F. If you have a judgment lien on your home: In many circumstances, judgment liens attached to your home can be “voided”—the lien undone and the underlying debt written off.  The debt itself is treated as an unsecured debt and is paid whatever percentage all your unsecured creditors receive through your Chapter 13 plan. Usually this does not increase how much you end up paying to the creditors, but rather just shifts how much each of your creditors gets paid (if anything at all).

G. If you have an income tax lien: Chapter 7 does not have an effective way of dealing with an income tax secured through a tax lien. Chapter 13 does. Whether the tax lien is on a tax which can or cannot be discharged, your Chapter 13 plan will arrange to pay only those taxes that must be paid during the life of your case. So at the end of your case all necessary taxes will have been paid in full and the tax lien will be released.

H. If you have a child or spousal support lien: Another situation where Chapter 7 cannot help, under Chapter 13  the ex-spouse or support enforcement agency would be stopped from enforcing the lien, you’d have the length of your case to pay the arrearage, so that by the end of the case you would be current and any lien would be released.

These are the main special powers that Chapter 13 provides to help you keep your home. Often these are used in combination, to fight back at each of the ways your home is being attacked. Whether you just need to use one or two or a bunch of them, these powers make keeping your home much more likely to actually happen.