Foreclosure and Chapter 13 Bankruptcy

Chapter 13 bankruptcy differs from Chapter 7 in that it allows a debtor to restructure his debts.  Chapter 7, on the other hand, often referred to as no-asset bankruptcy, is a debt liquidation plan and allows a debtor to discharge most of his debts.

Chapter 13 Requirements

Debtors who are facing foreclosure most often choose to file Chapter 13 rather than Chapter 7 bankruptcy.  However, there are certain requirements which must be satisfied for a debtor to file a Chapter 13 case.  The requirements to be a Chapter 13 debtor are as follows:

• The debtor must be an individual rather than a corporate entity;
• The debtor must have regular income which is greater than his monthly living expenses;
• The debtor must have liquidated unsecured debts not exceeding $336,900; and
• The debtor's secured debts cannot exceed $1,010,650.
  

Once a debtor files a Chapter 13 case, the automatic stay goes into effect and prevents his creditors from making any collection efforts against him, including lawsuits, foreclosure, repossession, garnishment, phone calls, and letters.  A creditor who violates the automatic stay may be held in contempt by the bankruptcy court.

Filing Chapter 13

A Chapter 13 debtor is required to file a plan, known as the Chapter 13 plan, with the court.  The Chapter 13 plan must set forth how the debtor plans to repay his debts, both secured and unsecured.  A debtor who is delinquent on his mortgage payments is required to repay the arrearage through the Chapter 13 plan.  Additionally, a Chapter 13 debtor must begin making his post-petition mortgage payments the first month after he files his bankruptcy petition.  The bankruptcy trustee assigned to his case will expect to see proof that all post-petition mortgage payments have been made before recommending confirmation (approval) of the Chapter 13 plan.

Chapter 13 Bankruptcy Resolutions

The debtor will be required to turn over 100% of his monthly net disposable income to the trustee for distribution under the terms of the Chapter 13 plan.  Net disposable income is calculated by subtracting the debtors total monthly expenses from his net monthly income.  Most times, payments to the trustee are made via income deduction from the debtor's pay check each pay period.  Until such time as the debtor's employer begins making the income deductions, the debtor is required to make his plan payments to the trustee.

In order to be included in the Chapter 13 case and receive payments out of the Chapter 13 plan, creditors must file with the bankruptcy court a document known as a proof of claim.  The proof of claim sets forth the amount of the debt and the nature of the debt.  If a debtor disagrees with the proof of claim he can challenge it by filing an Objection to Claim.  If the creditor fails to respond to an Objection to Claim, the claim will be denied.  If the creditor responds to the objection, it must demonstrate that the claim is valid in all aspects.  If the creditor is unsuccessful, the claim will be denied or it may be modified.  If the creditor successfully proves the validity of the claim, it will be accepted by the court and paid according to the terms of the Chapter 13 plan. 

Chapter 13 and Mortgage Debt

Additionally, if a debtor is upside down in his mortgage (he owes more than the property is worth), he may want to consider filing a Motion to Avoid Lien or an adversary proceeding to value collateral.  Under certain circumstances, junior liens can be reduced or eliminated altogether if the debtor successfully demonstrates that the amount owed on the junior lien exceeds the total value of the property after taking into consideration the balances owed on senior liens.

If a debtor successfully avoids a lien, he must complete his Chapter 13 case and receive a discharge in order to be fully relieved of any liability for the avoided lien.  If the debtor does not receive a discharge or if his case is dismissed, the debtor is liable for the full amount of the debt, plus any interest that would have accrued while his Chapter 13 case was pending.

As long as a debtor makes all post-petition mortgage payments and all plan payments, he will be allowed to remain in possession of his property.  However, if the debtor falls behind on either his plan payments or his post-petition mortgage payments, the lender can seek to have the stay lifted so that it can commence foreclosure proceedings.  Moreover, the trustee can seek to have the case dismissed for failure to comply with the terms of the Chapter 13 plan.  If the case is dismissed, the debtor returns to a pre-petition status with his creditors.  It's as though he never filed bankruptcy; his creditors can pursue all legal remedies against him, including foreclosure.

Due to the complex nature of Chapter 13 bankruptcy cases, it is highly recommended that you hire an experienced bankruptcy attorney to represent you.   

• If you may be facing foreclosure or already in the process, Consult Your Case for Free with a local certified Foreclosure Attorney to see your best options you have available to avoid Foreclosure.