Chapter 13 Bankruptcy can Stop Foreclosure and Save Your Home

November 7, 2011

By: David M. Serafin

As more Colorado homeowners struggle to keep up with their mortgage payments, as an Aurora, Colorado chapter 13 lawyer, I’ve found that the big banks such as Wells Fargo, Chase, and Bank of America rarely ever restructure mortgages or grant requests for a loan modification and instead proceed full speed towards foreclosure. Fortunately, chapter 13 allows a homeowner behind on mortgage payments, who is a wage earner or has regular income, to stop foreclosure and save the home by proposing a plan in the best interests of creditors and making up missed payments under court supervision. The bankruptcy Automatic Stay rules will stop any collection activity by the lender. At the same time, the debtor will continue to make the regular monthly payments outside of bankruptcy.

For example, consider a struggling homeowner who is behind by 6 mortgage payments of $2,500 each month. The $15,000 in missed mortgage payments, plus reasonable costs and attorneys fees for the lender in participating in the chapter 13 case, can be made up over 3 to 5 years, interest free, while the debtor continues regular payments. This is referred to as curing mortgage arrears. Even if the bankruptcy filer passes the Means Test and qualifies for the shorter three year plan to pay back credit cards or medical bills, a five year plan to absorb the full amount of past due mortgage payments can be approved by the Bankruptcy Court in Colorado. Regardless, as the Means Test, determines the extent to which other debt must be paid back to creditors, my job is to make sure that my client can afford to make plan payments and successfully complete the chapter 13 process.

Absent the lender’s voluntary agreement to either accept a loan modification request in reducing mortgage principal or the interest rate, and/or extending the loan term, or adding the mortgage arrears due to the end of the loan, chapter 13 is necessary to protect a home if the homeowner cannot pay back the entire amount due before the foreclosure sale. (Colorado state law requires the homeowner to pay back the “reinstatement amount” consisting of back mortgage payments, plus fees/costs, in one lump sum payment by 12 Noon of the last business day prior to the foreclosure sale date.) It is especially critical that the chapter 13 petition be filed before the foreclosure sale as Colorado no longer allows a homeowner a six month right of redemption to pay back the arrears post-foreclosure.

Once chapter 13 bankruptcy is filed, the homeowner must timely and fully make all plan payments AND mortgage payments. A missed plan payment may lead to the bankruptcy trustee moving to dismiss the case and a mortgage payment missed AFTER the case is filed may invite the loan servicer to request Relief from Automatic Stay in the bankruptcy case and pursue foreclosure back in state court.

Overall, before I recommend chapter 13 as a means of foreclosure avoidance, it is important to also compare the home’s value versus debt. Is the debtor attempting to make up missed payments for a seriously underwater property or is there equity to be preserved? The further underwater a property is, the less feasible chapter 13 appears and the more likely I will recommend chapter 7 and for my client to walk away from the property. Also, chapter 13 is made less feasible if the debtor has a high ratio of debt to income.

To learn more about saving your home from foreclosure, please contact the Law Office of David M. Serafin at (303) 862-9124.