The Power of Chapter 13 to Save Your Home (and its Limitations)—Part 1

January 11, 2010 by Oliveros & O'Brien, P.C.

Chapter 13 bankruptcy helps you save your home with a set of different powerful tools. In fact so many that we will discuss just some of the most important ones here in this blog, and then more in next week’s blog.  As helpful as these home-saving tools are, they each come with conditions and limitations. Knowing these pluses and minuses helps you get the most out of a Chapter 13 case.

 

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1. The “Automatic Stay”: A Chapter 13 filing stops a foreclosure in its tracks.

The moment your bankruptcy case is filed, a court order is automatically imposed against your mortgage company and the rest of your creditors to stop any of their actions against you or your property. That includes foreclosures of your home.  By federal law, if your house is about to be foreclosed, the filing of Chapter 13 stops that foreclosure. Or if your mortgage company is about to start foreclosing, your filing stops it from doing so. This protection is immediate. And it lasts throughout the 3-to-5 years that a standard Chapter 13 lasts . . . as long as you meet some essential conditions.  

Conditions and Limitations:

First, timing is critical. On a standard “non-judicial” foreclosure of a trust deed in Oregon, your Chapter 13 must be filed before the foreclosure sale takes place or else it is too late.

Second, the bankruptcy system tries to balance the rights of homeowners and mortgage companies so, starting immediately after your Chapter 13 is filed, you must resume making regular monthly mortgage payments, insurance payments, homeowners association fees and taxes.

Third, after filing Chapter 13 if you as the homeowner do not follow these rules, the mortgage holder will likely file a “motion for relief from the automatic stay.” Depending on the facts of the case, you could lose this protection. Chapter 13 provides a second chance to save your house, but the system can be quite unforgiving if you are unwilling or simply unable to follow those rules.

2. More Time to Cure Mortgage Arrears: Years instead of months to catch up.

Chapter 13 generally allows you the whole length of your case—usually 3 to 5 years--to catch up on the back payments you owe at the time your case is filed. This is much longer than the few months that mortgage creditors usually allow otherwise. As a result the amount you have to pay per month towards this is much lower. So Chapter 13 is often the cheapest option on a monthly basis, in fact sometimes the only feasible one.

Conditions and Limitations:

You not only usually get to take the length of your case to pay the mortgage arrearage; you must pay that amount off before the end of the case. Sometimes the amount of arrearage is very high, especially if the mortgage holder has been slow in foreclosing and/or has paid a year of the property taxes or insurance if you weren’t paying them. If you do not show that you have enough monthly cash flow to cure the entire arrearage by the end of your case, the bankruptcy court will not approve, or “confirm,” your Chapter 13 plan.

3. Cure prior property taxes: Stop tax foreclosures, and catch up over time.

Counties cannot foreclose on real property until the homeowner is at least three years behind on paying the property taxes, so tax foreclosures are not all that common. But you can easily fall behind on property taxes if they are not included in your monthly mortgage payments, and all your money is going towards making those payments. Or even if a property tax “escrow” amount is calculated into your monthly mortgage payment, when you fall behind on those payments the mortgage holder does not have the money to make the annual property tax payment. If you fall behind, Chapter 13 keeps the county tax assessor on hold as you catch up. Often even more importantly, if you’ve fallen behind on the property tax, you have broken your commitment to your mortgage company not to let this happen, giving it another reason to foreclose. But Chapter 13 protects you from this while you are given more time to bring the taxes current.

Conditions and Limitations:

During your Chapter 13 case you must pay interest on any late property taxes, at a high 16% annual rate. Because that is probably a higher interest than anything else in your Plan, we will likely try to pay it off as quickly as your cash flow allows. Also, because the real property tax lien is by law the one that comes first in line on any piece of property, even in front of the first mortgage, every dollar paid toward it gives your mortgage holder(s) that much more of a secure position in the property. So at the beginning of the case they will be scrutinizing not just how the Plan proposes to treat them directly, but also how it addresses the property taxes. And throughout the case, they will likely keep an eye on whether you are making progress on both.

 

Conclusion

Chapter 13 IS a more complicated and often more expensive way of dealing with your debts compared to Chapter 7. But it provides tremendous advantages for homeowners, in the right circumstances. To learn how a Chapter 13 could work for you, please click on the “Contact Us” tab above, or call Mike O’Brien at 503-786-3800.