Falling Behind in Mortgage Payments During Chapter 13 Bankruptcy

Falling behind in mortgage payments in Chapter 13 bankruptcy can create a series of events that lead to foreclosure.

  1. After the Chapter 13 bankruptcy debtor has failed to pay their mortgage for about 2 to 3 months, the mortgage company’s attorney will send a letter giving them the opportunity to catch up on their payments.
  2. If the bankruptcy debtor fails to immediately catch up on their payments, the mortgage company will file a “motion for relief.” The motion for relief basically is a request from the creditor that the bankruptcy trustee lift the automatic stay protection and allow them to foreclose on the property.
  3. Once they file the motion for relief, the debtor’s bankruptcy attorney will most likely suggest that the debtor settle the issue with the mortgage lender by agreeing to catch up on their payments over the course of 6 to 8 months plus pay the filing costs and attorney fees associated with the motion for relief. This will usually cost the debtor about $600 to $800 dollars. And that’s in addition to the delinquent mortgage payments they must make.
  4. If the bankruptcy debtor decides against settling the issue with the mortgage company and the issue comes before the bankruptcy trustee, there is a possibility that the trustee will grant the creditor’s request. If the court grants the creditor’s motion for relief, they will have the right to foreclose on the property and collect attorney’s fees despite the debtor’s bankruptcy status.

Debtors who fall behind in mortgage payments in Chapter 13 bankruptcy need to contact their bankruptcy attorney immediately. If their financial circumstances have changes, they may be able to have their Chapter 13 bankruptcy payments reduced or even have the case converted to a Chapter 7 bankruptcy and still save their home from foreclosure.

Can I Convert My Chapter 13 to a Chapter 7?

Chapter 13 bankruptcy essentially creates a repayment plan over the court of five years. During that period, you will have to be able to make monthly payments. And not only on your outstanding debt — but your current debt as well, like car payments, mortgage payments, and anything else secured by real property. Chapter 7 is tailored toward discharging unsecured debt. This debt is essentially credit card bills, medical expenses, and private loans. In other words, debt that is not secured by any real property.

Chapter 7 is great for discharging unsecured debt, while Chapter 13 handles secured debt much better. If you have filed for Chapter 13, but you have a lot of unsecured debt and you’ve fallen behind on your mortgage payments, it might make sense to petition the court to convert your bankruptcy from a Chapter 13 into a Chapter 7.

When Is Converting to Chapter 7 Possible?

There are a number of good reasons to file for Chapter 13 over Chapter 7. One of the major ones is to ensure that you can compile your debt into a plan that protects secured assets like your home. If you qualified for Chapter 7 and you elected to file for Chapter 13, then you should not have an issue simply converting the bankruptcy over to a Chapter 7. Should you convert it is another question entirely. More on that later.

Many folks, however, did not qualify for Chapter 7 and may have been forced into Chapter 13. These individuals will need to present evidence to the court that their financial situation has changed or that they cannot make the monthly payments required of their Chapter 13 bankruptcy.

The same eligibility standards apply to converting a Chapter 7 as they do applying for one. Unless your income has dropped below the state median, you will need to pass the means test. Essentially, you will need to prove that your income minus your (reasonable) expenses don’t leave you with enough disposable income to manage your finances.

Passing the Means Test Does Not Automatically Qualify You for Chapter 7

Courts are under no obligation to award Chapter 7 bankruptcy to a filer simply because they passed to the means test. For this reason, many high-income filers are forced into Chapter 13 regardless of whether they can make good on the monthly payments. If you go back to the court with foreclosure looming on the horizon, they may take a closer look at your finances to determine if you qualify for Chapter 7.

Any change to your finances may have a major impact on your qualifications for Chapter 7 as well. Talk to a bankruptcy attorney about your options.

When Is Converting to Chapter 7 a Good Idea?

If you qualified for a Chapter 7 discharge within the last 8 years you can still convert your bankruptcy to a Chapter 7, but there is a rather significant catch. You cannot discharge the debt. In most cases, it won’t be worth converting the bankruptcy because you’ll still owe the money that is unpaid to creditors after liquidation.

With that out of the way, there are a number of reasons why you would want to convert your Chapter 13 into a Chapter 7. The main reason to convert a Chapter 13 to a Chapter 7 is:

You have substantial unsecured debt that is preventing you from making payments on your home. In this case, you can have the unsecured debt discharged in Chapter 7 while still making payments on your mortgage and other secured debt. When a large chunk of your debt is unsecured and your total payments are more than you can afford, converting will be a huge benefit.

What If the Court Forces a Conversion?

Despite what you may think, a court-forced conversion is not necessarily a good thing. The court will only force a conversion when it has cause. If you miss a payment because of an unexpected medical reason or because you needed to have your car repaired, the court is unlikely to force a conversion to Chapter 7. If they do force a conversion, there may be some expectation that they can liquidate a considerable amount of assets to repay your creditors.

It is essential, of course, to operate in good faith with the court and your creditors. Failure to do so may result in a conversion forced upon you that has a significant impact on your ability to keep assets you value.

Talk to a Dallas Bankruptcy Attorney If You’ve Fallen Behind in Mortgage Payments

If you’re trying to make payments in good faith but failing to do so, a bankruptcy attorney can help. We can help you petition the court to convert your Chapter 13 into a Chapter 7 and discharge your unsecured debt. This move will not make sense for everyone and not everyone will qualify, but there may be a way for us to let keep your home and make your payments more manageable. Contact Allmand Law Firm today to set up an appointment.