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Behind on mortgage in bankruptcy. What now?

Justin HarelikQuestionDear Bankruptcy Adviser,
We are three years into a Chapter 13 bankruptcy, and we have had issues with our house. We have fallen behind on our mortgage since filing, and we have also not paid our real estate (property) taxes. We are not sure what to do or if there is any way to turn this around. Should we let the house go?
-- Mike

AnswerDear Mike,
I am very impressed you stayed in the Chapter 13 this long. That is great news. The vast majority of Chapter 13 filers do not last that long. It is hoped you can find a way to recover and remain in the Chapter 13 until you can eliminate your debts.

Chapter 13 bankruptcy is known as a reorganization bankruptcy. People file this type of bankruptcy for various reasons. In general, these cases last from three to five years, during which time you make a monthly payment to the court-appointed trustee. The trustee then administers payments to your creditors.

In your case, you keep your house as long as you make the mortgage payments and the payment to the trustee. You are past the halfway mark of the Chapter 13 plan, but you have fallen behind on the mortgage. Let's hope one of these options work for you.

1. Work out an agreement with the lender to get caught up on the delinquent payments. This is the most difficult option because you continue to make your normal monthly mortgage payment along with an additional payment to get caught up on the mortgage delinquency. Unless the reason you fell behind was just a one-time temporary issue, making a larger monthly payment may not be possible.

2. Modify your loan with the lender. You are still allowed to modify the loan even while you are inside the bankruptcy. The final modification agreement requires court approval, but the lender can work on the modification while the bankruptcy is active.

Some representatives working for the lender make this option very difficult and say you must have court approval to even discuss a modification. Once a representative says "no," politely say "thank you," hang up the phone and call back. Someone at the bank knows you don't need court approval just to work on a modification, only court approval for the lender to finalize the modification. The court needs to see that the lender has approved a modification, not just that the lender is willing to talk to you about one.

While you recently became delinquent, you did have two years of perfect post-bankruptcy mortgage payments. Lenders approve loan modifications during a bankruptcy when the homeowner has made at least 12 consecutive post-bankruptcy filing mortgage payments. You could even receive a loan modification having made less than 12 consecutive payments. The better your post-filing payment history, the more likely the lender will approve your request.

3. Place the delinquent amounts into the bankruptcy. You may be able to amend the Chapter 13 plan to add in the post-filing delinquent payments. This means you would pay the mortgage lender as you had in the past and continue with the Chapter 13 plan payment. The Chapter 13 plan payment to the trustee may increase, but you could spread out the delinquent mortgage payments over the remainder of your bankruptcy.

This is not a common option, but I have seen the lender agree to it before. Once the lender agrees, you then need the court appointed trustee to agree. That is why this option is challenging but possible.

4. Let the case be dismissed and refile another Chapter 13. You must consult with a bankruptcy attorney in your area before considering this option. There are a few issues that could be specific to your particular case, and you would want competent legal advice before taking this route.

5. Convert to a Chapter 7. You need to know whether you are eligible to convert to the Chapter 7 and also whether the lender will consider working on a loan modification while inside the Chapter 7 bankruptcy. This is the riskiest option, but can be a viable one under the right circumstances.

It is hoped you can receive competent advice to make an informed decision. I believe option No. 2 is the best option available; let us hope your lender will agree.

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