A homeowner called my office recently with a question I have heard many times over the years: “My foreclosure sale is coming up. Is it too late to file bankruptcy?”
Sometimes it is not too late. But this is one situation where waiting until the last minute can make things considerably more difficult.
For a Massachusetts homeowner who has fallen behind on mortgage payments but has enough income to make the regular payment going forward, Chapter 13 bankruptcy can be a very useful option.
What Happens to the Foreclosure When Chapter 13 Is Filed?
In most cases, filing a bankruptcy petition creates what is called the automatic stay.
The automatic stay generally prevents creditors from continuing collection activity, including a pending mortgage foreclosure. The stay normally takes effect when the bankruptcy case is filed; you ordinarily do not have to wait for a separate court order before it begins. There are important exceptions, particularly when someone has had one or more bankruptcy cases dismissed during the previous year.
Stopping the foreclosure, however, is only the first part of the process.
Chapter 13 needs to provide a realistic way to deal with the mortgage arrears.
You May Not Have to Pay All the Arrears at Once
This is where Chapter 13 can be particularly helpful.
Suppose your regular mortgage payment is $2,500 per month and you are $30,000 behind. You have returned to work and can now afford the $2,500 monthly payment, but you cannot possibly come up with another $30,000 immediately.
Chapter 13 may allow you to resume making your regular mortgage payments while paying the $30,000 arrearage through a Chapter 13 plan over time.
Federal bankruptcy law specifically allows a Chapter 13 plan, in appropriate circumstances, to cure a mortgage default while the debtor maintains the ongoing mortgage payments. Chapter 13 plans generally last three to five years and cannot extend beyond five years.
That can turn an impossible situation into a manageable one.
Instead of the mortgage company demanding the entire arrearage to stop the foreclosure, the homeowner may have an opportunity to spread the arrears over the Chapter 13 plan.
The Regular Mortgage Payment Still Has to Be Paid
This is probably the most important part for homeowners to understand.
Chapter 13 does not make the regular mortgage payment disappear.
If you want to keep the house, you generally need enough income to pay the mortgage payments that come due after the bankruptcy is filed and make the required Chapter 13 plan payment.
For example, if someone is $40,000 behind but still cannot afford the regular monthly mortgage payment, simply filing Chapter 13 may postpone the problem rather than solve it.
Before filing a case, I want to know whether the numbers actually work.
That means looking at household income, the regular mortgage payment, the amount of the arrears, taxes, car payments and normal living expenses. The goal should not simply be to stop next week's foreclosure. The goal should be to put together a plan the homeowner has a reasonable chance of completing.
Don't Wait Until the Foreclosure Sale Has Taken Place
There is another reason to act early.
The Bankruptcy Code generally permits a debtor to cure a default on a principal residence until the property has been sold at a foreclosure sale conducted in accordance with applicable nonbankruptcy law.
Once the foreclosure sale has occurred, the legal issues become much more difficult.
That is why someone who receives a foreclosure notice should speak with an attorney well before the scheduled sale date. Even if bankruptcy ultimately isn't the best solution, knowing the available options early is much better than trying to put together an emergency filing immediately before an auction.
What If You Filed Bankruptcy Before?
A previous bankruptcy can change the automatic-stay rules significantly.
If a person had a bankruptcy case pending and dismissed during the preceding year, the automatic stay in a new case may terminate after 30 days unless the bankruptcy court extends it. If two or more cases were pending and dismissed during the previous year, the stay generally does not automatically take effect and the debtor may need to ask the court to impose it.
This is another reason I would not assume that simply filing another bankruptcy will automatically stop a foreclosure.
The prior cases need to be reviewed first.
Chapter 13 Isn't Right for Everyone
If you are current on your mortgage and your primary problem is credit cards, medical bills or personal loans, Chapter 7 may be the simpler option.
Chapter 13 becomes particularly useful when there is a problem that needs time to fix. Mortgage arrears are a good example.
For someone who wants to keep a home, can afford the regular mortgage payment going forward, but cannot immediately pay a substantial mortgage arrearage, Chapter 13 may provide the time needed to get caught up.
The important thing is not to wait until the foreclosure auction is about to occur.
If you are behind on your mortgage or have received a foreclosure notice, Common Law Associates, LLP can review the mortgage arrears, your income and expenses, and the status of the foreclosure to determine whether Chapter 13 is a realistic way to save the home.