I got a call last night from a client whose home is scheduled to be sold at a foreclosure sale in a few days. He and his wife have very little unsecured debt (like credit cards). But they have one huge problem. A few months back the wife lost her job, and during the time she was unemployed, they fell behind on their mortgage payments. In fact, they fell way behind on payments.
The good news is the wife found another job and they now make enough money to make their house payments. However, the lender–as is the case all too often–won’t work with them to restructure their mortgage. It’s insisting on a large lump sum in order to reinstate the mortgage loan. Like many things lenders do, this makes no sense. If the lender forecloses, it will end up owning the property. And foreclosure properties sell for significantly less than other properties. While waiting for it to sell, the lender must pay for repairs, maintenance costs, utilities, and taxes. The home would then sell months from now for a huge loss and, on top of all this, the lender would have to pay a realtor’s commission at closing.
Despite this reality, lenders press on with foreclosure, apparently glad to hasten their losses. Go figure.
Bankruptcy Stops the Foreclosure Sale
But here’s where Chapter 13 comes to the rescue. When your bankruptcy is filed, an automatic stay enters, which stops the foreclosure. However, that you must file bankruptcy before the property is sold. In South Carolina under the hammer rule rule, once the gavel hits, the property is sold, and your ability to cure the mortgage arrearage is gone. So stopping the sale is the first step.
Your Chapter 13 Plan Allows You to Catch Up on Payments
In addition to being able to stop the sale, Chapter 13 allows you to catch up on missed mortgage payments. We call this curing the arrearage. For example, if you are $10,000 behind, you could propose to cure that arrearage by paying $200 per month into a five-year plan to do this. (And obviously, if you are only $5,000 behind, you could propose $100 per month to cure the arrearage.) You’d also likely have other debts to deal with such as car payments. These, too, would be paid in your plan. But the big picture is that Chapter 13 allows you to do what your mortgage lender won’t. You simply pay a bit extra each month and get caught up on payments over time.
But What If I Can’t Afford My Mortgage Payments?
And there’s the rub. For Chapter 13 to work, you have to be able to resume making your regular, ongoing mortgage payments and, at the same time, pay an additional amount into your Chapter 13 plan to cure the arrearage. If you can’t make your regular payment, your plan is not feasible, and it won’t be approved by the court.
You also need to understand that Chapter 13 can’t lower your mortgage payment or your interest rate. (There is an exception to this with a second or third mortgage that’s wholly unsecured, and I’ll address in a future post.)
For many people, however, Chapter 13 is a great foreclosure avoidance tool, especially when the reason for the mortgage arrearage was a temporary loss in income like the couple who contacted me about their upcoming foreclosure sale.
Important: Don’t wait until the last minute to contact a bankruptcy lawyer if you are facing foreclosure. Act quickly even if you are still trying to work things out with your lender. If you wait until a day or two before the sale, you may not be able to find a bankruptcy lawyer who can help you in time.