Are your high credit card bills preventing you from making your mortgage payment each month, although you have a steady income? Filing Chapter 13 Bankruptcy may be the solution you have been looking for.
If your mortgage lender has sent a letter warning you of an impending foreclosure, has already begun to foreclose on your house, or your home is about to be sent to a Sheriff’s Sale, you need to read this. You may be able to save your home by filing bankruptcy now.
Why are you behind on your mortgage payments?
Can you save your house with bankruptcy? The answer depends on your income, what kind of debt you have besides your mortgage, and what your monthly payment looks like.
There are, broadly speaking, three reasons why families lose their home to foreclosure. The first is unaffordable housing, especially in markets like San Francisco and New York City. The second is affordable housing but irresponsible spending. The final reason is the loss of income, whether from termination or the death of an uninsured spouse.
If You Cannot Afford Your Home
Realistically, a private home in these markets is not affordable for middle-class families, and even low-level executives would struggle to afford in many of these markets.
Conventional wisdom dictates that housing and utilities should not require more than 30% of your annual salary, yet aspiring young couples often commit 50% or more to secure their dream home early in life. Some may make a decision to be “house poor” and make cuts in other areas of their lifestyle to attain that dream home, but being house-poor often means being one bad month away from being homeless.
If your mortgage payment leaves no disposable income at the end of the month, it is easy to fall behind should an unexpected debt arise.
If You Need to Adjust Your Spending
Whether a bankruptcy can save your home depends on why you fell behind on your payments.
Are your credit cards maxed out? Did you get stuck with the bill for a wedding or funeral? Did you suffer a medical emergency and got left with outlandish bills for emergency care? Did you take out a personal line of credit to pay down old bills, only to end up deeper in debt?
All of these are “unsecured debts” that can be discharged in bankruptcy. Chapter 13 bankruptcy can lead to the discharge of these debts as long as you follow the repayment plan.
Are your debts related to court-assessed fines, criminal restitution, child support, unpaid taxes, or federal student loans?
These are known as priority debts; they cannot be discharged through bankruptcy.
Missed Mortgage Payments Due to Loss of Income
Ask yourself a simple question: If your unsecured debts were to disappear, could you make the monthly mortgage payment on your home?
If the answer is no, absent any alternative like help from family you may have to surrender your home, which you can do without liability for the mortgage in either a Chapter 7 or Chapter 13 bankruptcy filing.
If the answer is yes, then Chapter 13 bankruptcy will be able to save your home. As part of a court-approved repayment plan, you will make your mortgage payment and any other secured debts on time and in full. Then, your disposable income is applied to monthly plan payments 3 to 5 years.
Once your repayment plan is completed, the balance of your unsecured debts will be discharged. It doesn’t look very good on your credit, but it sure beats having your home sold out from under you for insolvency.
Save your Home in Five Steps
- Meet with an experienced Bankruptcy Attorney. Come prepared with information on your outstanding debts, available income, and savings, and disclose any legal obligations (like child support) that you have to pay each month.
- Assuming you qualify for bankruptcy after the consultation, work with your attorney to provide the necessary documentation and sign your paperwork. Your bankruptcy will soon be filed, and an automatic stay will temporarily freeze pending Sheriff’s sales or foreclosures.
- Decide if you will keep the collateral for other secured debts. Multiple vehicles, summer homes or cottages, boats, and other secured property could be surrendered in your bankruptcy filing to reduce your monthly debt and make it easier to pay on your mortgage.
- Agree to a payment plan and get it approved by the Bankruptcy court. While your plan typically requires you to dedicate all of your disposable income, you can often use medical conditions or child-care expenses to create a buffer of income in reserve.
- Make your Chapter 13 payments on time and in full. A failure to complete your Chapter 13 repayment plan will lift any bankruptcy protections and make it possible for your home to be foreclosed on.
Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.