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Dear Bankruptcy Adviser,
We are in foreclosure and trying to keep our home. My question is this: If we file a Chapter 13 bankruptcy and begin paying our mortgage again, what if we find the bankruptcy payments too difficult to pay? Can we convert to a Chapter 7 bankruptcy? If we do that, can they still foreclose if we continue making the current mortgage payments?
I get this question quite often and I truly hate answering it. Not because I don’t understand why the client is asking me the question. Rather, it’s because it is usually coming from the 1st stage of the 5 stages of grief: denial.
Clients who ask this question still believe that they will be able to save their house and that the lender will find a heart and say, “We did not want to work with you before but now have decided, why not?”
Stay in Chapter 13 ’til current
While you can save your house, the bank would have to cooperate in order for you to achieve the goal you state above. Since you are likely filing bankruptcy because the bank has failed to cooperate, you may need to stay in the Chapter 13 until you are current on the delinquent mortgage payments.
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A few of my clients have been denied for loan modifications before filing a Chapter 13 bankruptcy, which sets up a monthly debt payment plan lasting 3 to 5 years. But their Chapter 13 bankruptcy failed because they could not make the payments. Then, they converted to a Chapter 7 bankruptcy and got a loan modification from the lender.
However, I believe this is the exception, not the rule. The bank has no legal obligation to accept payments when you fall behind. If you are able to bring the mortgage current, the bank must accept future payments. But once you fall behind, the bank can refuse any payments until you bring the loan current.
The only way to guarantee that you can save your home is to make the payments to the court and to the lender each month for the terms of your bankruptcy.
4 reasons to file Chapter 13
Homeowners typically file Chapter 13 for 1 of 4 reasons. One, the owners make too much money to qualify for a Chapter 7 bankruptcy — they fail the means test that determines eligibility for Chapter 7 protection. In such cases, Chapter 13 is the only option.
A 2nd reason to file Chapter 13 is the property has equity that cannot be protected in a Chapter 7 filing. The amount of home equity that can be shielded in a Chapter 7 varies by state. You must consult with a bankruptcy attorney before filing a bankruptcy if you believe you have equity in the house.
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Three, a Chapter 13 filing is often made when a person needs to catch up on delinquent payments. This is what you, already in foreclosure, are trying to do. The bank has denied your loan modification request and you want to pay back the delinquent balance. But you don’t have the money to pay the balance all at once, so you need to have the balance spread out over the next 3 to 5 years.
During the term of your Chapter 13, the bank cannot refuse your regular monthly payment. Nor can it refuse to have the delinquent balance spread out over the next 3 to 5 years, under the court-approved payment plan.
Unfortunately, until the delinquent balance is paid in full, the bank does not have to change the terms of your loan. The court does not have the power to force the bank to modify it.
One important note: You can reapply for a loan modification while you are making payments inside the Chapter 13. Some banks would be willing to work with you on this. You might need to first show a history of 12 monthly payments, but this is still an option.
The 4th reason for a homeowner to file a Chapter 13 is to try to wipe out junior liens. If your 1st mortgage is badly underwater, in some cases Chapter 13 may allow you to wipe out 2nd or 3rd mortgages. But this is a complicated option, as I have discussed in prior columns.
In your case, you will need to stay in the Chapter 13 until you are current on your mortgage, or until the bank grants you a loan modification. Converting to a Chapter 7 while still delinquent on your old mortgage payments is very risky and could cost you the house in foreclosure.
Ask the adviser