Dealing with Mortgage Problems in Chapter 13

Sacramento homeowners have been noticing that home prices are rising. For some, this means that they are emerging from being “underwater” and slowly gaining equity in their homes. Despite this trend, there are still many folks that owe more than their house is worth. And still many folks who are falling behind on their mortgage payments, whether or not there is equity in their home.

A report published by a realty tracking company in June found that 7.4 million borrowers are still “seriously” underwater on their mortgages. “Seriously” is defined as the loan amount being at least 25 percent higher than the property’s estimated market value. Over 13 percent of all properties with a mortgage are in this group, which is an increase from the first quarter of 2015.

Fortunately, Chapter 13 bankruptcy offers a number of solutions for homeowners to pay off arrears (back debt on the mortgage) or prevent or delay foreclosure.  And for homeowners in these situations chapter 13 offers much more leverage than trying to settle the debt directly with the creditor.

If a homeowner is behind on her mortgage and is struggling to get current on payments, Chapter 13 bankruptcy can be an effective way to save the home. The basic idea of a Chapter 13 bankruptcy is that the debtor pays all or a portion of the debts over time through a repayment plan. This would allow the homeowner to spread out the arrears over the course of the plan and eventually catch up. Of course, the debtor will need enough income to cover the plan payment and pay for living expenses. But an experienced bankruptcy attorney can help make sure the plan works.

Another way Chapter 13 bankruptcy can help a homeowner with mortgage problems is by eliminating second or third mortgages. If the first mortgage is secured by the entire value of the debtor’s home, there may not be enough equity left to secure additional mortgages. Since many homes have dropped in value since the mortgage debt was incurred, this is a common occurrence. In such a situation, a bankruptcy attorney can often get the bankruptcy court to “strip off” the second and third mortgages and recategorize them as “unsecured” debt. Such unsecured debt is the last priority to be paid in a Chapter 13 plan and they are often not paid in full. If the plan is completed, the unpaid balances of general unsecured debt are then discharged.

One of the reasons Chapter 13 bankruptcy can help is that the Automatic Stay can halt all foreclosure proceedings until the repayment plan is approved by the court. If the plan accounts for the unpaid arrears and is deemed feasible by the court, the plan will likely be confirmed and the mortgage lender will be bound by the plan.

All of these solutions provided by Chapter 13 bankruptcy can be complicated and they are contingent on the court approving the Chapter 13 plan. This can be a very difficult task. If the debtor tries and fails, there could be repercussions like the automatic stay not going into effect. This is why it is incredibly important to seek counsel from an experienced bankruptcy attorney who knows the Sacramento bankruptcy courts.

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