How Are Mortgage Loans Handled in a Chapter 13 Bankruptcy?

 Posted on January 06, 2023 in Bankruptcy

Filing for bankruptcy is a big decision, but it can be necessary in order to get back on your feet financially, especially if you have experienced difficulties that have made it impossible to make ongoing payments toward large debts. However, if you are a homeowner, you will likely be looking for solutions that will allow you to avoid foreclosure and keep your home. In many cases, Chapter 13 bankruptcy is the best option, but it is important to understand how mortgage loans will be handled in these types of bankruptcy cases.

What Is a Chapter 13 Bankruptcy?  

A Chapter 13 bankruptcy is also known as “reorganization” because it allows you to reorganize your debts into manageable payments over three to five years. During this period, you will make payments to a court-appointed trustee, who will distribute the payments to different creditors. If all payments are made on time and according to the plan, the remaining unsecured debts may be discharged at the end of the repayment period. Through this method, you can eliminate debts like credit cards and medical bills. Unlike a Chapter 7 bankruptcy, Chapter 13 will not require you to turn over any property that you own, and this may allow you to protect the equity in your home.

During your bankruptcy repayment plan, you will also be required to make ongoing mortgage payments. The amount you pay each month toward your repayment plan will be based on your disposable income, or whatever is left over after paying your regular monthly expenses, including food, clothing, utilities, insurance, transportation costs, and auto loan and/or mortgage loan payments. This will ensure that you will be able to cover all of your family's needs while using the leftover income to pay off some of your debts, and once you have completed your repayment plan and eliminated various unsecured debts, you will be more likely to maintain financial stability in the future.

It is also worth noting that if you are behind on your mortgage payments when you file for bankruptcy, those "arrears" may be included in your repayment plan. That will allow you to pay off these amounts over time without the threat of foreclosure by the mortgage lender. Depending on your circumstances, you may also be able to remove a second or third mortgage from your home. This is known as "lien stripping," and it is an option that is available if the amount you owe on your first mortgage is higher than the value of your home. Lien stripping will reclassify a second or subsequent mortgage as an unsecured debt that can be discharged when you complete your repayment plan. 

Contact Our Mecklenburg County Chapter 13 Bankruptcy Attorney

If you are struggling with debts and concerned about losing your home, bankruptcy may be your best option for receiving financial relief. Before deciding whether or not filing for bankruptcy is right for you, it is important to consult with an experienced Union County bankruptcy lawyer. At Blossom Law PLLC, we can help you understand the best ways to address mortgage loans, and we can provide guidance as you make important decisions about your financial future and legal help as you proceed with the bankruptcy process. Contact us today at 704-256-7766 for a free consultation.

Sources:

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics

https://www.mvt.com/Content/Public/Files/3.%20%20Lien%20Stripping%20in%20Bankruptcy%20Chapter%2013%20and%20Chapter%207.pdf