We help hundreds of our clients file Chapter 13 bankruptcies each year. Some file to save their homes from foreclosure, others to save their cars from a repossession. A handful file to provide enough time to pay all of their debts off within a 3-to-5-year timeframe. When it comes to saving your home from foreclosure, is paying your mortgage through a Chapter 13 bankruptcy plan a good idea or not?
Whatever the reasons for filing, we need to address how any mortgages on our clients’ homes are being treated. For some, that means paying the ongoing mortgages, plus any arrearages, through a Chapter 13 plan. For the rest, that would require direct payments to the mortgage company like before the bankruptcy was filed.
Mortgages are usually (but not always!) the most expensive payment our clients have, and also the payments that cause the most stress. We offer good reasons why paying your mortgage through a Chapter 13 bankruptcy plan is a good idea – and a few reasons to avoid it if possible.
The Chapter 13 Trustees in Kansas and Missouri are required to keep detailed records of any payments they make. If your mortgage creditor files a proof of claim stating the current monthly payment and the arrearages to be paid through the plan, that information goes into the trustee’s records. Every month, the trustee makes distributions.
This is also a convenient way of consolidating all of your debts in one payment, without worrying about making the bankruptcy payment and a mortgage payment.
You may be surprised to hear this, but mortgage companies make their fair share of errors. Having the trustee’s records will decrease the odds of your mortgage company incorrectly listing late fees and charges for “missed” payments that have cleared your account. Even those who do pay their mortgages directly should keep very detailed records in case any disputes come up.
Also, one of the requirements to receive a discharge in bankruptcy is to make any “direct” payments timely during your plan. If you fall behind on payments you told the court you would make directly (like a mortgage or student loan payment) late in your Chapter 13 plan, you might have problems completing your plan and receiving a discharge of debts.
Chapter 13 trustees earn their money from your payments to creditors. If you add in a large mortgage payment, the trustee’s fees on that payment can be significant. On a $2,000 per month mortgage payment, the trustee could receive $150-$160 just on that payment.
Also, if you fall behind on your plan payments, because you were sick, lost your job, had unexpected expenses, or some other issue arose, then the Chapter 13 Trustee won’t have the funds to pay your mortgage. So now you are not only behind with your bankruptcy payment, but your mortgage might be falling farther and farther behind. It’s a scary feeling.
Some mortgages will have adjusted payments during a Chapter 13 plan. Mortgage servicers performed escrow analyses to see if you have enough money on hand to handle real estate tax and hazard insurance escrow payments. Other loans are adjustable rate and can rise if the economy and interest rates improve. If your mortgage increases, the Chapter 13 plan would have to increase as well.
We know how important your home is to you and your family. The best way to ensure your continued comfort in your home is to speak with your diligent and compassionate bankruptcy attorney, who can explain what options are available to retain your home during a Chapter 13 bankruptcy.
By Ryan Blay, W M Law Attorney