What if my mortgage payment increases while I’m in Chapter 13 Bankruptcy?

March 12, 2020
What if my mortgage payment increases while I’m in Chapter 13 Bankruptcy?

What if your mortgage payment increases while you’re in Chapter 13 Bankruptcy? If you were not behind on your mortgage before you file bankruptcy, then you would just continue making your regular mortgage payments directly to the mortgage company.

If you were behind on your mortgage before you filed bankruptcy, then your regular mortgage payments must be paid through the Chapter 13 Trustee … otherwise, your proposed payment plan will not be confirmed (approved) by the judge.

Changes in the Escrow

If you’re like most homeowners, you’ll notice that your mortgage payment will change each year to accommodate any changes in the escrow (real estate property taxes and insurance).  Usually, that means an increase in the overall monthly mortgage payment because real estate taxes, especially, rarely ever seem to go down.

This impacts your Chapter 13 plan because if the Chapter 13 Trustee was to just keep making your old mortgage payment to the mortgage company your account will eventually fall behind.

In fact, every time there is a change in the monthly mortgage payment your mortgage company is supposed to file paperwork in your Chapter 13 case to let the Chapter 13 Trustee know what your new monthly mortgage payment … so the account won’t fall behind.

An increase in the mortgage payment over three to five years is not insignificant and if not accounted for in your plan payments going forward eventually the Chapter 13 Trustee will consider your plan payments to be behind simply because the Trustee will begin making the new mortgage payments and will reduce payments to other creditors in your plan to accommodate that.

Thus, other creditors will not be paid what you said they’d be paid when your case was first filed and so to be able to pay those creditors what they are owed the plan payments will have to increase so that your plan still finishes within the time frame required (typically must finish all payments in your plan by month 60).

Ways to Fix the Issue

There are a few ways to try to “fix” this increasing mortgage payment issue.

One way to fix the issue is to anticipate this from the beginning of the case and simply include some extra money in the plan.  A good rule of thumb is to provide an extra $1,500 to $2,000 in your plan if you are a Below Median debtor and an extra $2,500-$3,000 in your plan if you are an Above Median debtor.

Another way to fix the issue is to just automatically increase your plan payment to the Trustee when your mortgage payment changes.

If you don’t do one of the above and your plan eventually is considered “behind” by the Trustee, then you’ll have to increase the rest of your plan payments so your plan finishes “on time”.

If you have questions about any of your options regarding the above please contact one of our attorneys.

COVID-19 UPDATE

W M Law is open for business.

We are still providing customer service to our existing bankruptcy and estate planning clients and we are available for free initial consultations over the phone for new clients.

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