Each year, people file for Chapter 13 bankruptcy to take advantage of the protections offered by the bankruptcy while paying debts in an orderly manner. It’s especially popular with people who fall behind on a mortgage payment. Learn how Chapter 13 filers can continue making current house payments, catch up on mortgage arrearages using the Chapter 13 repayment plan, and keep their house after completing the three- to five-year plan.
How Chapter 13 Bankruptcy Works
Qualifying for Chapter 13 consists of demonstrating that you have enough income to pay the debts required by bankruptcy law. If you'd like to keep a home, you'll have to show the court that you have a regular income source and can afford monthly payments.
You'll also need to prove you can repay any mortgage arrearages, your monthly living expenses, and more. A local bankruptcy lawyer can quickly calculate what you'll pay monthly in Chapter 13.
Keeping Mortgage Payments Current in Chapter 13 Bankruptcy
During the Chapter 13 case, you must keep your mortgage current. Depending on your jurisdiction, you might be able to pay your house payment outside of the repayment plan, which is much cheaper because you avoid the six to ten percent trustee fee.
Instead, you'll likely certify to the court periodically that you’re up to date with your house payments. In some jurisdictions, a filer behind on payments at the outset must pay the monthly mortgage as part of the plan (more below, see "conduit" plan).
Missing a Mortgage Payment in Chapter 13 Bankruptcy
It’s not unusual for payment issues to arise during a Chapter 13 bankruptcy because of how long the plan lasts. You might get laid off, lose your car in an accident, or experience some other destabilizing event that can cause you to get behind again.
If you miss a mortgage or plan payment, the effect on your Chapter 13 case will depend on the type of plan used in your jurisdiction. If you act fast, you can often avoid dire consequences, such as a dismissal of your case or losing the protection of the automatic stay—the order that stops your creditor from taking steps to collect what you owe.
Traditional Chapter 13 Plan
In a traditional Chapter 13 plan, your mortgage payment isn’t included in your repayment plan. You’ll make your regular monthly mortgage payment to your lender directly and a separate payment to pay other outstanding debts to the bankruptcy trustee responsible for overseeing your case. If you miss even one mortgage payment, the lender can ask the bankruptcy court to allow the lender to proceed with foreclosure.
Conduit Chapter 13 Plan
Some bankruptcy courts have instituted what is often called a conduit plan. Instead of making your monthly mortgage payment directly to your lender, you’ll make it to the Chapter 13 trustee as a part of your monthly plan payment. The Chapter 13 trustee is responsible for channeling that payment to the lender (thus the name “conduit”).
A conduit plan theoretically gives the Chapter 13 trustee more control over a case's progress and an opportunity to correct payment problems before they get out of hand. For instance, some jurisdictions require you to use a conduit plan if you have mortgage arrearages when you file the case. If you're having financial difficulties, the trustee will know when you miss a due date.
One problem with a conduit plan is that you pay the trustee's fee on all funds dispersed to creditors. Because the trustee's fee can be up to 10%, paying your mortgage this way can be expensive.
Depending on the jurisdiction, the trustee might issue a notice that your case will automatically be dismissed if you don’t make your payment by a certain date. The protocol in another court may require the trustee to file a motion to dismiss your case, which will be set for a hearing before the bankruptcy judge. You’ll want to learn about your court’s procedure or discuss the local practice with a bankruptcy attorney.
Agreements to Catch Up Mortgage in Chapter 13
Missing a payment or two doesn’t necessarily mean your Chapter 13 plan is over, although you certainly want to avoid this situation. If you're making your payment outside the plan, your best bet is to bring your payment current as quickly as possible. You can try speaking with the lender, but many hesitate to commit to outside arrangements during bankruptcy.
If you're paying your mortgage through the plan, you can try to arrange with the Chapter 13 trustee to catch up. These agreements are often informal and made with the understanding that you must make the missed payments within a month or two, or else the trustee will file a motion asking the court to dismiss your case. The bankruptcy court might give you additional time, but it's less likely given most courts honor a trustee's request.
You should also know you must catch up on late fees and additional interest. If you don't and a balance remains, you could be assessed late fees each month until the end of your case. These fees add up quickly, and you don't want to be stuck with a large balance at the end of your plan when the purpose was to ensure you're caught up after all your hard work.
