When to file Chapter 13

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Dear Bankruptcy Adviser,
My husband and I were advised to opt for Chapter 13 bankruptcy to help us from going into foreclosure with our home. My husband has been out of work due to a disability and will not go back to work for at least a year and maybe more. We are already four months behind and we are preparing to lose his short-term disability.

Even though he has applied for Social Security, we don’t know if, when and how much he will get. I don’t know how it works when a home is involved, as to how much you pay back over how long of a period. Can you advise?
— Jennifer

Dear Jennifer,
I wish I could provide you with an answer assuring you that all will be OK and you will be able to keep your home. While Chapter 13 is an option, based on these facts, it appears that you will have great difficultly qualifying for this type of bankruptcy. Unless you are working and earning sufficient income, or your husband can start working sooner than expected, you may find it challenging to keep your home.

Chapter 13 bankruptcy is known as a reorganization bankruptcy. It is usually filed by individuals who want to pay off their debts over a period of three years to five years; need to catch up on delinquent accounts (like mortgage arrearages); or make too much money after reasonable and necessary expenses to qualify for Chapter 7 — aka “fresh start” bankruptcy.

Typically, only those individuals who have predictable income and whose income is sufficient to pay their reasonable expenses, with some amount left over to pay off their debts, are likely to complete the three year to five year commitment period.

Chapter 13 bankruptcies are very difficult for the debtor (i.e., you) because, with some exceptions, every disposable dollar must be used to pay back your creditors. Even though the debt is included in the Chapter 13 reorganization plan, the majority of creditors typically get paid very little, if anything at all.

Very often, the payment is too difficult for the debtor to make, and the majority of Chapter 13 cases are never completed. This is more common today with the home-loan meltdown occurring. More and more people are filing Chapter 13 bankruptcies to save their homes, then discovering it is too difficult to make both the mortgage and Chapter 13 plan payments.

Additionally, the lender is not obligated to modify your loan terms or payment just because you filed bankruptcy. You will still have to make the normal monthly payment. And if your loan payment is scheduled to adjust, the bankruptcy will not stop the payment from increasing (or in some cases, decreasing) based on the loan terms.

Anyone can file Chapter 13 bankruptcy, but not everyone is entitled to have their case approved (known as “confirmed” in bankruptcy terms). In most cases, you will need to make your mortgage payment starting the month following the filing of your case. And your Chapter 13 plan payment generally must arrive, in the form of certified funds, 30 days after your case is filed.

It is not impossible to save your home, but remember: If you have had trouble paying your first mortgage before filing bankruptcy, then you must be realistic and realize you may have just as much trouble paying it after you file. Make sure you do not expect your attorney or the mortgage lender to be able to obtain better options for you once you file your case. That is rare, if not altogether impractical.