Bill and Jill are happily married. They both work, make decent money, and pay their bills on time. They own a home together and have never been late on a payment. Financially, it appears that Bill and Jill are going to do quite well. Unfortunately, neither Bill nor Jill was immune the economic storm that swept the globe.
Bill received a letter from his boss that his job position might be eliminated and Jill's hours are being reduced because budget cuts. Like many Americans, Bill and Jill have financially planned by saving up money. Months go by, and Bill is worried that their planning didn't cover this long of a "recovery". Bill's job is becoming less secured and Jill's hours are now reduced to half of what it used to be. They've exhausted a majority of their savings, 401k, and IRA to keep up with monthly bills, including their mortgage. Inevitably, B & J run out of cash and start to fall behind on their mortgage. Several months go by, and B & J now have a foreclosure notice.
Later on, B was offered a new job with a different company. This one pays only a little more money, but it was enough that B & J can make their monthly mortgage payments. However, the bank won't stop the foreclosure process unless B & J catch up on all of their late payments. There was simply no way that Bill can pay several month of late mortgage payments to cancel the foreclosure. The bank refuses to work with Bill and told him that it will auction the house off in 90 days. What can Bill do to save his home?
Sadly, it's not a very well known fact that a Chapter 13 Bankruptcy can stop a foreclosure. A Chapter 13 Bankruptcy is the type of bankruptcy where the debtor sets up a plan to repay a portion of his/her debts. If the Plan meets all the requirements for court approval, a bankruptcy judge signs the plan into an order. The order prevents the bank from foreclosing on the debtor's property while he/she is making payments.
In a home-saving situation, the Chapter 13 plan will include a provision that requires total payments of all late mortgage payments. The debtor has up to 5 years to pay up the late mortgages. While he/she is making the payments, the bank is not allowed to foreclose on the property based on these late payments alone.
For example, if Bill's monthly mortgage payment is $1,000 and Bill is 5 months behind, his mortgage arrears is $5,000 ($1,000 x 5 months). In order to prevent the bank from foreclosing, Bill can either (1) pay the bank $5,000 to get caught up or (2) file a Chapter 13 and pay off the $5,000 over 5 years ($83.33/month). As long as Bill is paying his ongoing monthly mortgage payment on time plus the extra $83.33 (paid through Court), the bank can't foreclose. This is likely how Bill will save his home.
All of this can be confusing because a Chapter 13 Plan requires a great deal of legal engineering before the Court will approve it. If you know anyone who is losing their home and they want to save it, you should point them to a bankruptcy attorney before it's too late.
Arrow Law Group, PLLC | Bankruptcy Attorneys