Mortgage lenders and Chapter 13 bankruptcy cases

On behalf of Bankruptcy Law Firm of Clare Casas on Monday, January 19, 2015.

Many Florida homeowners who consider bankruptcy have questions about what will happen to their mortgages if they choose to file. The answer largely depends on the type of bankruptcy petition that is filed, with Chapter 13 providing greater protection against foreclosure proceedings.

In Chapter 13 bankruptcies, filers commit to a repayment plan for their debts over a period of three to five years. During the entire repayment plan period, an automatic stay will be in place, preventing creditors from taking further action. If a foreclosure has been filed but the property has not been auctioned, the stay will prevent the bank from foreclosing during the repayment plan period.

Through the plan, debtors have the ability to stretch out repayment of their delinquencies over the entire plan, thus giving them the ability to potentially catch it up and save their homes from foreclosure. Second mortgage holders may have their liens removed entirely from properties that have little or no equity by the trustee. If the trustee does this, the second mortgage will be converted into an unsecured debt. At the end of the repayment period, converted second mortgage balances will be discharged along with the remaining amounts owed for other unsecured debts. The first mortgage will remain, and a debtor who has caught up on the delinquency can continue forward with paying the mortgage as agreed. If a debtor misses a payment during the plan, however, the trustee might dismiss the bankruptcy, leaving the debtor vulnerable to a foreclosure action.

For people who meet the eligibility guidelines for filing Chapter 13 bankruptcy petitions, this type of bankruptcy can provide a good way to put a halt to foreclosure proceedings. People who are facing foreclosure and want to save their homes may want to consider this avenue.

Source: SF Gate, "What Do Mortgage Companies Do With Chapter 13 Bankruptcy?", M.C. Postins, accessed on Jan. 18, 2015