Home Loans In Chapter 13 Bankruptcy
There are many reasons why a person files a Chapter 13 bankruptcy case. Some people are facing foreclosure or repossession while others may have a creditor threatening to garnish wages. Regardless of why an individual needs to file a bankruptcy case, everyone is afforded the same protection under the Bankruptcy Code. Creditors must stop all collection efforts immediately upon the filing of the bankruptcy petition. The automatic stay prevents creditors from beginning or continuing a collection action once the bankruptcy case is filed. This is particularly important if the person filing the bankruptcy case is behind on his or her home loans.
How are Home Loans Treated in Chapter 13 Bankruptcy?
A mortgage or home loan is considered a secured debt. Secured creditors have a lien on collateral that secures the debt owed — your home loan, car loan, etc. These types of debts are treated differently in your bankruptcy plan compared to unsecured debts. If you want to keep your home, you must continue to pay your home loan. Home loans cannot be “modified” through your Chapter 13 plan. However, if you are behind on your home loan payments, you can use bankruptcy as a way to catch up the past due payments to keep your home.
If you want to keep your home, you must include the past due payments on your home loan in your Chapter 13 bankruptcy plan. This amount will be paid in full, without interest, over several months or years depending on the amount you owe and your bankruptcy plan. The trustee forwards payments to your mortgage lender each month until the past due payments are paid in full. You must resume your normal payments outside of the bankruptcy plan if you want to keep your home. The benefit to you is that you stop foreclosure and are not required to catch up the entire past due balance as you would if you were working directly with your mortgage company to resolve the default.
Valuing Home Loans Through Chapter 13
You cannot modify your home loans through your bankruptcy plan; however, you may be eligible to “value” your second home loan at zero. A successful motion to value a second mortgage depends on the current market value of your home and the payoff of your first mortgage. In order to value your second home loan at zero, the payoff on your first mortgage must be greater than the market value of your home. For example, if the payoff on your first mortgage is $125,000 and the market value of your home is $110,000, you can ask the court to value the second mortgage at zero because the lien on your home is not secured by any equity in your home. In other words, if your home were sold there would be no funds for the second mortgage company after the first loan was paid in full.
Your bankruptcy attorney will discuss the option of valuing a second home loan at zero if your circumstances fit the narrow requirements for eliminating your second home loan through your Chapter 13 bankruptcy plan.