- Chapter 13 bankruptcy allows you to keep certain debt, as long as you are able to continue making the payments. The terms of the debt are often modified, such as a lower interest rate or reduced late fees. Eliminating debt can provide you with extra money to use toward the mortgage. If you have a second mortgage on the home, it may be discharged as unsecured debt.
- About 20 to 40 days after filing the bankruptcy petition, the trustee will hold a meeting of creditors to obtain basic facts about your finances. The creditors and trustee will have the opportunity to ask you questions to learn more about your ability to pay the debt. You may need to provide proof of finances, including bank statements and pay stubs. It is important to continue making your current mortgage payment during the bankruptcy process.
- Within 15 days of filing the bankruptcy petition, you are required to submit your proposed repayment plan. Your repayment plan must detail how your debt will be paid in full. All debt that will not be discharged must be included. Certain debt is considered top-priority, such as child support and taxes. The secured debt, including your mortgage, should follow. Any remaining income after paying your debt and current expenses is considered disposable income. If you have disposable income, it must be used to pay unsecured debt. A repayment plan will last either three of five years, depending on your income.
- Even with a repayment plan in effect, you are still obligated to make the current mortgage payment directly to your lender. If you are unable to make your payment, contact the lender immediately to discuss possible options. A temporary payment suspension, known as a forbearance, may be offered. In some cases, you can refinance at a lower interest rate, even with a Chapter 13 repayment plan. Notify the trustee of the situation at the first sign of change. The plan may be modified to match the circumstances. For example, a reduction in income may result in a lower payment or longer repayment plan. If the funds are no longer available that could allow you to afford your home, you may be able to convert your Chapter 13 bankruptcy to a Chapter 7 bankruptcy. Through Chapter 7 bankruptcy, assets are liquidated to cover debt. Although you cannot keep the home, you can start with a clean slate. If you are unable to make the repayment plan payments to the trustee and fail to communicate, a motion to dismiss the bankruptcy case will likely be filed. You will be given a specified period of time, typically 30 days, to pay the balance of the missed payments. If you are unable to pay, the case will be dismissed and the lender can proceed with a foreclosure.