If you'd like to stop making mortgage payments in Chapter 13 bankruptcy, you can, but you must let go of the home. Keeping a house in Chapter 13 requires making regular mortgage payments as they come due, catching up on missed payments if you're behind, and paying creditors for any home equity not protected by bankruptcy laws.
However, you might not have to pay for a junior mortgage after bankruptcy if you have multiple mortgages and your house has lost value. Learn about this exception and other ins and outs of paying—or not paying—your mortgage in Chapter 13 bankruptcy.
Paying a mortgage is not a requirement of Chapter 13 bankruptcy. If you can't afford your house payment or no longer want the home, you can let it go back to the lender and wipe out the debt.
When taking this approach, Chapter 13 will erase almost all house-related debts. For instance, you can eliminate homeowner association fees in addition to mortgages. Also, you won't be responsible for a "deficiency balance" if the lender sells the home at auction and receives less than you owe (however, unpaid property tax debt isn't eliminated in bankruptcy).
When you return the home to the lender, you'll pay some of what you owe through the Chapter 13 plan, but it will likely be substantially less than you'd pay otherwise. The lender will share a percentage of your "disposable income" with other unsecured debts, like credit cards and medical bills. Once you finish the case, the bankruptcy "discharge" order eliminates any remaining balance.
To keep your home in Chapter 13, you must continue making regular mortgage payments during bankruptcy. Lenders require a "lien" allowing the lender to foreclose, which isn't removed by bankruptcy. If you don't pay the mortgage, the bankruptcy court will allow the lender to foreclose using its lien rights, and you'll lose the home.
In most bankruptcy jurisdictions, you continue to send your mortgage directly to your lender outside of bankruptcy. However, some courts require debtors to pay mortgage payments to the bankruptcy trustee as part of their Chapter 13 plan—especially if you're late when you file. This can be expensive because trustee fees can be up to 10% of the amount paid to creditors.
If you're behind on your mortgage payments, you must also pay the arrearages through the Chapter 13 plan. Stretching the arrears over an extended three- to five-year repayment period helps make it more affordable for debtors to catch up on missed payments.
This benefit isn't available in Chapter 7, which is one of the primary reasons people use Chapter 13 to help keep houses when they're behind on payments.
Sometimes, a homeowner can eliminate mortgages in Chapter 13 bankruptcy. The process is called "lien stripping" and applies only to residential homes in Chapter 13—not Chapter 7. It's also not used much because it requires multiple mortgages and the home's value must be worth less than what's owed—a situation that can arise when the housing market declines.
When you prove to the bankruptcy court that a junior mortgage is "wholly unsecured," the bankruptcy court "strips" the lien attached to the property. "Wholly unsecured" means that not even a dollar would be available to pay the junior mortgage.
Wholly unsecured mortgages are treated like credit card balances, medical bills, and other unsecured debts. They don't receive much because they share a percentage of your disposable income. The bankruptcy court eliminates the lien and any remaining balance when you complete your plan and obtain a discharge.
Although you won't make a wholly unsecured mortgage payment during bankruptcy, you must continue paying all other mortgages during your bankruptcy to keep your home.
Another factor you must meet to keep your home in Chapter 13 can increase your monthly plan payment fast. You must pay creditors an amount equal to any home equity not protected by a bankruptcy exemption. It's not uncommon for this requirement to cause a monthly payment to be more than some filers can afford.
Example. When Hunter fell behind $6,000 on his house payment, he met with a bankruptcy lawyer about filing for Chapter 13. Hunter was stunned to discover that he would have to pay $106,000 over five years or $1,767.00 monthly, plus late fees, the trustee's fee, and any other amounts required in Chapter 13, in addition to his $2,000 house payment. Why? Because Hunter had $175,000 in home equity, and his state's homestead exemption protected only $75,000. As a result, his creditors would be entitled to $100,000 for the nonexempt equity plus the arrears ($100,000 nonexempt equity + $6,000 arrears = $106,000).
If you don't make timely ongoing mortgage payments, your lender can ask the court for permission to foreclose, and the court will likely grant it. The lender makes the request by filing a motion asking the court to lift the automatic stay that prohibits collections when you file for bankruptcy.
Unless you fully repaid your mortgage during Chapter 13, you'll continue paying it after completing the Chapter 13 plan. You won't be responsible for any junior mortgages eliminated through lien stripping.
Filing for Chapter 13 is complicated and rarely successful without legal representation. Before you file your case and propose a repayment plan to the court, talk to a bankruptcy attorney in your area.