If you’re behind on your mortgage, Chapter 13 gives you up to 5 years to catch up. How does this actually work?
Various tools can help you keep your home when you file a Chapter 13 “adjustment of debts” case. The most basic of those tools is protection from foreclosure and other collection efforts by your mortgage holder for up to 5 year while you catch up on any back payments.
If you are many thousands of dollars behind on your home mortgage, you need to fully understand how this catch-up tool works before you can decide whether Chapter 13 is the help you need. This blog post, and the next one, should answer your biggest questions about this.
A Simple Example
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 a year or so to pay that arrearage—amounting to about an extra $1,250 per month. So you’d likely have to pay close to that amount IN ADDITION to the $1,500 regular payment over the course of a year, which would be impossible for most people.
Contrast this to paying $250 per month through Chapter 13. If even this much lower amount seems hard to you, be aware that this would almost always come with the elimination or significant reduction in what you would be paying to your other creditors.
(To keep the above calculation simple here, we’ve not included some other details, such as mortgage lender late fees, maybe some attorney fees, and probably some other costs, as well as Chapter 13 trustee fees, which would all skew the numbers.)
Does My Mortgage Lender Have to Give Me That Much Time under Chapter 13?
Most of the time, yes, your mortgage lender must give you time, although it may be able to attach conditions in its favor.
Using 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 on this, especially if you have little or no equity in the home or if you have been especially erratic on the mortgage payments.
These conditions could be potentially dangerous to you. For example, the lender could require conditions stating what would happen if in the future you failed to pay either the arrearage payment or the regular monthly mortgage payment on time. If so, that could automatically trigger the bankruptcy court’s permission for the lender to start (or re-start) foreclosure proceedings.
So, Chapter 13 gives you a relatively long time to catch up on your missed mortgage payments, but the system is not very patient with you if you are then not able to keep to that payment schedule.
What If I Don’t Need 5 Years to Catch Up?
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 property and recent income taxes or child/spousal support arrearage) 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 want to finish your Chapter 13 case as soon as you can, but should keep your monthly payment low enough to make more likely that you will be able to complete it successfully. Most cases must run at least 3 years. If your pre-bankruptcy income qualifies you for a 3-year plan (instead of requiring a 5-year one), you are usually allowed to have a plan that lasts anywhere between 36 and 60 months, depending on how much “disposable income” you have and how much in mortgage arrearage and other debt you have that must be paid within the length of your Chapter 13 plan.