Why am I doing Chapter 13?
This is a question I tend to get a lot from my clients who are in the middle of a Chapter 13. Most often, the question is from a client who otherwise qualified for a Chapter 7 but was intent on saving their home from foreclosure and decided to file under Chapter 13 to cure arrearages and/or eliminate a second mortgage. After months of making regular plan payments and realizing that Chapter 13 leaves them with absolutely no money to save, some start to question the rationality of doing it in the first place.
So why are you doing a Chapter 13?
In most cases its because of an imminent foreclosure. Let’s say you are 6 months behind and your mortgage payment is $1500. Now your lender is ready to foreclose and you are thinking of filing Bankruptcy. You are approximately $10,000 in arrears and have enough income to pay your mortgage payment but not enough to pay back all the arrears in one lump some. Which Chapter of Bankruptcy do you choose?
- If you go into a Chapter 7, you might be able to work with your lender to roll the approximately $10,000 in arrearages on to the back of your loan, but the likelihood of obtaining this type of loan modification is slim. Chapter 7 would buy you some time and breathing room from foreclosure but unless your lender is willing to work with you, it is very likely that you will just be postponing the foreclosure until the end of your case or until your lender seeks relief from the automatic stay to conduct its foreclosure.
- If on the other hand you filed a Chapter 13, your Chapter 13 plan would pay back the $10,000 in arrearages on your mortgage with 0% interest over the course of 36-60 months. The total duration of your mortgage would also stay the same. During the course of the Chapter 13, if you make all regularly scheduled mortgage payments and your plan payments, your lender cannot foreclose and must accept this result.
If you are absolutely intent on keeping your home and there is little or no hope that your lender will work with you on the arrears or you have already tried a loan modification with no success, Chapter 13 appears to be the only option.
That being said, I am of the opinion that when your home is so far upside-down that even after the term of the Chapter 13 is over you still would be underwater, it does not make business sense to try and keep your home. More often than not cutting your losses on your house and walking away, eliminating all your debts, and getting a true fresh start with Chapter 7 would in-fact leave you better prepared to purchase a home 3-5 years down the road if in-fact that is something you really want to do. The clients I have that have chosen this route always seem happier without the burden of trying “save” their home. Many actually end up renting their home back from the bank or the the new owner for substantially less than they were paying to “own” it.