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Using Chapter 13 Bankruptcy to Avoid Foreclosure

There are situations when filing a Chapter 13 bankruptcy can help a homeowner save their house from foreclosure. When a debtor files the petition for bankruptcy relief, the automatic stay kicks in, preventing creditors from collecting any debts from the debtor. (Please see our section on the Automatic Stay for more information). During the lifetime of the bankruptcy, the Automatic Stay will prevent the bank from initiating or proceeding with a foreclosure. This gives the debtor an opportunity to pay back the money owed against the mortgage.

The debtor’s Chapter 13 repayment plan should be designed so the debtor makes regularly monthly payments to the trustee that consist of, not only the regular monthly mortgage payment, but also one 60th of the arrearage amount. The debtor will make these payments every month for five years.

For example, let’s say a debtor is $10,000 behind on his mortgage and has a regular monthly payment of $1,200 (to include taxes and homeowner’s insurance). The Chapter 13 repayment plan will have the debtor continue to make the $1,200 monthly mortgage payments to the trustee. In addition, the $10,000 owing in arrears will be paid back during the lifetime of the bankruptcy, usually five years or 60 months. Dividing $10,000 by 60 gives us the additional monthly payment amount of $166.67 for the arrears. The debtor will pay the trustee $1,867.67 ($1,200 plus $166.67) per month for 60 months. The exact figure on the Chapter 13 monthly payment will be higher than this, however, to account for any attorney’s fees, payments on additional secured debt, the filing fee, and the trustee’s 3.75% fee.

Filing a Chapter 7 bankruptcy will temporarily stop foreclosure proceedings, but because the life of a Chapter 7 is usually only three to four months long, filing for Chapter 7 bankruptcy is generally not an effective way to save a home from foreclosure.