How can I save my house? Using Bankruptcy Protection…

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Bankruptcy protection is often used to prevent foreclosure and provide an opportunity for the debtor to restructure the mortgage balance on affordable repayment terms.

When debtors fall behind on their mortgages, the bank usually insists on repayment of all past due mortgage arrears, or repayment over a very short period of time – two to three months. This financial predicament is generally impossible for the borrower who wants to save his home.

The bankruptcy alternative is a Chapter 13 bankruptcy. Chapter 13 of the United States Bankruptcy Code gives the debtor an opportunity to restructure past due mortgage payments for a period of three (3) to five (5) years. This makes past due mortgage payments affordable for the debtor.

Chapter 13 bankruptcy is commonly referred to as a “wage earner” plan. The debtor needs to prove to the bankruptcy court that he or she has enough regular recurring income or a steady wage to manage making payments to a modest household budget and enough surplus income to pay off the debtor’s mortgage arrears over a period not to exceed five years. Enables you to pay off ( 5 years.

In some cases, the mortgage balance must be paid back with interest. However, this depends on the provisions laid down in the loan documents that govern the debtor’s debt.

Chapter 13 also enables debtors to restructure escrow advances made by the bank. If the debtor’s bank makes advances for real estate taxes, property insurance, etc., those advances may also be repaid over the Chapter 13 plan period, not to exceed five (5) years.

As an example, let’s say the debtor’s mortgage payment is $1,200.00 per month and the debtor is 24 months behind on his mortgage payments, and the total mortgage outstanding is $28,800. The debtor’s bank has initiated a foreclosure action and the bank is ready to auction the property.

Upon a Chapter 13 bankruptcy filing, all debt collection activity of creditors must cease, including the bank’s mortgage foreclosure.

The debtor can now design a plan to repay the mortgage balance on a payment plan that works within the debtor’s budget.

Upon entering Chapter 13 bankruptcy, the debtor must remain current on all monthly bills due after the date of his Chapter 13 filing. Therefore, the debtor’s income must be sufficient to pay his or her normal living expenses (mortgage, utilities, food, insurance, auto payments, medical expenses, etc.) and, in addition, must have sufficient additional income to pay Chapter 13 Plan payment ie mortgage arrears. This means that the Borrower must have a surplus income of at least $480.00 per month for the next five (5) years to pay off the mortgage balance. If it is affordable, the debtor may be able to save his or her home under a Chapter 13 plan.

The bankruptcy court will also require the debtor to make certain repayments to unsecured creditors. Most jurisdictions require unsecured creditors to repay at least 20% of outstanding unsecured claims. So in addition to repayment of the mortgage arrears, the debtor must be able to pay dividends to unsecured creditors. In our example, let’s say the debtor has $20,000 in credit card debt. The Bankruptcy Court will expect our debtors to pay at least $2,000.00 of unsecured credit card claims over a maximum period of five (5) years. Therefore, the Debtor’s income must be sufficient to cover his ordinary living expenses, the outstanding mortgage balance at the rate of $480.00 per month, and dividends to the general unsecured creditors of $33.33 per month.

As long as the debtor is able to pay his or her normal living expenses and Chapter 13 plan payments, he or she will be able to keep his or her home under the protections offered under Chapter 13 of the United States Bankruptcy Code.

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