How Bankruptcy Can Help You Save Your Home

Many people have found themselves falling behind on their mortgage payments, for one reason or another. Usually, a borrower need only miss three payments before the account goes into default. Since most mortgages contain power of sale clauses, the bank may initiate foreclosure proceedings upon default of the borrower, which eventually lead to an actual foreclosure sale, absent any action by a court of law.

Generally, borrowers are given the option of reinstating their loan by paying the "arrears", or amount past due, in full to the lender. However, for the unfortunate homeowner who found herself behind on payments, paying that amount in full can be very difficult.  

A borrower in this position may file a chapter 13 bankruptcy to stop the foreclosure and propose a court-approved payment plan whichs pays in full the arrears to the lender. A chapter 13 allows debtors to keep property and pay debts over time (the automatic stay imposed by the Court stops the lender from proceeding with the foreclosure sale). For example, a debtor who is three months behind on a mortgage whose payment is $2,000.00 per month would be in arrears by approximately $6,000.00.  He may propose a chapter 13 plan that provides for repayment of the full $6,000.00, paid monthly for up to 5 years. However, the debtor will also be responsible for the prospective contractual mortgage payment of 2,000.00 per month. That means that if the debtor is paying $100.00 per month for 60 months (paying off the $6,000.00 in arrears in 5 years), his total mortgage obligation would be $2,100.00 per month until the arrears are paid off. These figures do not account for Trustee commission, associated costs, or other debt obligations his plan provides for.

Although the chapter 13 payment obligation may increase the total mortgage obligation, it may be offset by the possibility of getting rid of a second mortgage (see Getting Rid of a Second Mortgage in a Chapter 13 Bankruptcy for more information).

Keep in mind that the Bankruptcy Court cannot unilaterally modify the terms of a senior purchase money mortgage for the primary residence of the debtor. However, often enough, lenders will allow a debtor to apply for a loan modification in the midst of a bankruptcy proceeding.

Whether or not keeping the home is in the debtor's best interest depends on several factors, including the financial feasibility of a chapter 13 plan and the overall value of the property itself. A cost-benefit analysis must be undertaken to determine which choice is best for you.