Catch-up a Mortgage or Stop Foreclosure

If you are behind on your mortgage, a Chapter 13 bankruptcy may help you fix the problem.

Often, once a person falls behind by a few months on a mortgage, the mortgage lender will refuse to accept any more payments on the mortgage until the mortgage is brought completely current. So, unless you have enough money to catch up all the payments that have fallen behind, the lender might start a foreclosure action.

A Chapter 13 bankruptcy can force the lender to stop the foreclosure and to let you catch-up on the mortgage. Usually, to make this type of bankruptcy work, the homeowner has to be able to afford to resume the regular monthly mortgage payment and to catch-up over time on the amount that is behind. So, after filing the bankruptcy case, the homeowner begins making the regular mortgage payment again each month to the mortgage company. Each month, the homeowner also makes a different payment to the bankruptcy trustee. Usually, the payment to the bankruptcy trustee is smaller than the mortgage payment. The bankruptcy trustee sends some of that payment to the mortgage company. The bankruptcy case – and therefore, the amount of time that a homeowner has to catch up the mortgage – can be up to five years.

Here is an example of how this could work:

John Smith makes $30,000 a year and has only two kinds of debts: a mortgage and credit card bills. He was having trouble making his $700/month mortgage payment and paying $400/month to credit card companies. He was struggling, but, he was making it. Then, he was laid off from work and fell behind on all of his bills. He is now back to work and would be able to afford the mortgage again if he hadn’t fallen behind. But, his mortgage is 8 months late and the mortgage company is demanding that he immediately pay all of the missed payments. With late fees and foreclosure costs, it would take $8,000 to catch up on the mortgage. A sheriff’s sale is scheduled on his home and if he doesn’t address this problem before the sale occurs, he will lose the house.

If John can afford to pay his regular $700/month payment to the mortgage company, and also a second payment of about $150/month to the bankruptcy trustee, he would be able to use a bankruptcy case to fix the mortgage problem. John would have to make those payments for five years. The bankruptcy trustee would send most of that $150/month payment to the mortgage company, which would use the money to catch up the $8,000 that John is behind. At the end of the successful bankruptcy case, as long as John has made all of the required payments to the mortgage company and the bankruptcy trustee, John’s mortgage would be current. He would then simply have to continue making his regular monthly mortgage payment.

If there is any money left over after the trustee has caught up the mortgage, the remainder would go to the credit card debts. If John could only afford to pay $150/month to the trustee, then the credit card debts would receive very little in this bankruptcy case and the unpaid balance of the credit cards would be discharged without payment. But, John has to pay the trustee however much he can afford. John would have to submit his budget to the court, which would review it for reasonableness.