One of the most common reasons people turn to Chapter 13 bankruptcy is to prevent foreclosure due to delinquent home mortgage payments. Filing a Chapter 13 petition triggers an automatic stay, which prevents the lender from taking collection actions, including foreclosure. What’s more, the stay remains in effect throughout the three- to five-year duration of the Chapter 13 case, during which you make monthly payments that partially satisfy your debts.

However, a Chapter 13 case does not relieve you of your obligation to continue with regular mortgage payments going forward, and failure to make them can still result in foreclosure. In fact, qualifying for Chapter 13 requires showing that you have enough income to pay for basic necessities like housing, which includes mortgage payments.

Nevertheless, a pending Chapter 13 case can help make your mortgage obligation more manageable in a number of ways, including these:

• Homestead exemption — Your home is part of the Chapter 13 estate, which means its equity value is factored into the amount you pay creditors monthly under the plan. However, you can reduce the monthly Chapter 13 payment if you elect to use the federal bankruptcy code exemptions. You can exempt $27,900 of the equity, or double that amount if you are married and filing Chapter 13 jointly.
• Mortgage modification — You can ask the lender to change the terms of the loan. Your interest rate could be adjusted or the length of the loan could be extended, both of which can reduce the monthly payment. Lenders often are more willing to cooperate in a modification during a Chapter 13 in order to avoid another default. They might even agree to waive certain costs, such as late fees and attorneys’ fees.
• Lien-stripping — Chapter 13 allows for removal (“stripping”) of junior liens, like a second mortgage or a home equity line of credit (HELOC), if your home’s value is equal to or less than the balance of your first mortgage. These can be converted to unsecured loans and made part of your Chapter 13 repayment plan. Unfortunately, lien-stripping cannot be done with your first mortgage.

More generally, the Chapter 13 plan lowers your monthly debt burden, which can make it easier to handle your regular mortgage payments.

While Chapter 13 doesn't reduce the principal balance of your mortgage, it offers an effective means of curing defaults, regaining financial stability and keeping your regular mortgage payments on course. Successful completion of the Chapter 13 plan can be essential to long-term homeownership, and working closely with a qualified attorney can be key to attaining that objective.

The Law Offices of James C. Zimmermann is a bankruptcy law firm with wide experience assisting New Jersey residents with mortgage relief, including Chapter 13. We have offices in Hackensack, Nutley, Wayne, Pompton Lakes and Vernon. Call 973-764-1633 or contact us online to schedule a free initial consultation.