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Repay Your Mortgage Arrears Over Time

In many ways, your Chapter 13 bankruptcy repayment plan is like a plan you might negotiate with the mortgage servicer. (See Ch. 4.) Either way, you have an opportunity to get your mortgage current over time. Of course, if the only reason you are filing Chapter 13 is to get time to get your mortgage current, and you could get a similar deal from the servicer, you’ll be better off not filing for bankruptcy, at least as far as your credit score is concerned.

EXAMPLE: Freddie owes $3,600 in missed mortgage payments. He receives a notice of default that gives him a month to pay up or lose his house. His lender refuses to work with him because of a previous notice of default—the lender doesn’t think he’s a good credit risk.

 

Freddie had fallen behind on his mortgage because he was laid off, but now he’s working again. If he files for Chapter 13 bankruptcy and gives up one of the cars he’s making payments on, he’ll be able to afford a repayment plan, under which he will stay current on his mortgage and also make up the arrears over three years. He proposes to pay down the arrears at the rate of $120 a month: $100 for the debt plus $20 a month for the trustee’s fee.

Part of the problem in workouts with a mortgage servicer is that servicers typically add on a wide variety of fees and costs, which make it difficult for the homeowner to reinstate the mortgage. In Chapter 13 bankruptcy, you can challenge the validity of these fees and costs on a variety of grounds. (See Ch. 7 for more on challenging claims submitted by mortgage servicers in and out of bankruptcy.)

It’s important to understand that Chapter 13 bankruptcy works to keep your house only if you have enough income to make both your current payment and pay off a portion of your arrears each month (plus costs and fees). And you must propose a plan showing not only that you can make plan payments but also that you can keep current on all your other reasonable and necessary monthly expenses, such as utilities, transportation, car note, insurance, and the like. Further—and this is a deal-breaker for some would-be Chapter 13 filers—you must pay some types of debts in full during the course of the plan. For example, if you owe recent back taxes, the court won’t approve your repayment plan unless it shows that you can pay off the taxes in full while your plan is in effect.

Finally, your plan must provide for a payment to the trustee of roughly 10% of the amount of all payments you make to creditors through the repayment plan. This can be another deal-breaker if, for example, you are forced to pay your mortgage through your plan rather than directly to the lender outside of the plan. Unfortunately, there is no uniform nationwide rule on this subject—the courts are split on whether or not the trustee can force you to pay your mortgage through the plan.

EXAMPLE: Marcia proposes a three-year Chapter 13 repayment plan, under which she will pay her $2,000 monthly mortgage directly to the lender. On the basis of her disposable income (roughly, the difference between her income and her necessary expenses), she also proposes to pay the arrears she owes on the mortgage and a percentage of her unsecured debt to the trustee at a rate of $139 a month ($5,000 over the life of the plan). Under this proposal, the trustee will be paid a fee of $14 from every monthly payment (36 in all).

 

Unfortunately, the trustee objects to Marcia’s plan, arguing that she should pay the current mortgage (as well as the arrears) through the plan. The court allows the trustee to require her to pay the mortgage through the plan. That means Marcia must amend her plan to pay an additional $200 a month (10% of the $2,000 monthly mortgage payment) as the trustee’s fee. Because Marcia doesn’t have enough disposable income to pay another $200 every month, she is unable to propose a feasible amended plan.