Foreclosure can be an overwhelming experience for homeowners who face it. There are a wide range of factors that can lead to foreclosure, especially in today’s economic climate, where inflation and rising homeownership costs have been shrinking household budgets. Unexpected financial setbacks, such as job loss, reduced income from lower commissions or decreased overtime can quickly lead to missed mortgage payments. Alternatively, an unforeseen expense, such as medical bills or an urgent home repair, may tie up funds that were supposed to be used toward a mortgage payment. As a result, homeowners often find themselves in danger of losing their homes. If you are facing foreclosure, Chapter 13 bankruptcy can offer you a path to save your home.

Options for Homeowners Facing Foreclosure

When foreclosure looms, there are several options available to a homeowner, but each comes with its own set of challenges. One option is a loan modification, which allows homeowners to adjust the terms of their mortgage to make payments more affordable and often place mortgage arrears to the back of a loan to bring the loan current. However, applying for a loan modification can be a difficult, stressful, and costly process, without any guarantees. For homeowners with low interest rates (which can be as low as 2%) modifying the loan might not even be possible, as many loan modification guidelines cannot create an affordable payment if the existing interest rate is already low (often from a prior modification) and combing the new modified payment at a market interest rate, (which currently can be as high as 7.5%) along with the mortgage arrears added to the loan does not allow for a more affordable payment.  As a result, many homeowners find themselves with a denial letter from their mortgage servicer wondering what they will do to save their home.

Another approach is to fight the foreclosure action in New York State Court, but this option can be both expensive and time-consuming, with no guarantee of success. In essence, a foreclosure action is a breach of contract claim for nonpayment, and the lender typically prevails. It can also delay the inevitable if the homeowner’s financial situation has not improved enough to allow for a modification of the loan at issue. In addition, while the case is litigated, mortgage arrears at a default interest rate will continue to mount. At the beginning of a residential foreclosure case, the matter is first sent for settlement and review of the case for loss mitigation options.

Unfortunately, there is no guarantee of a loan modification in loss mitigation. Furthermore, it is increasingly difficult to obtain a mortgage modification. There are a number of reasons why a loan modification may be denied. The most common reasons include the following:

• The borrower does not have income to afford the payment required by the loan modification guideline.
• The borrower has too much income and the debt-to-income ratio in the loan modification guidelines is not met.
• The borrower’s Loan to Value (LTV) ratio is too high or too low.
• The borrower has too many assets.
• The borrower has not provided a complete loan modification package.
• The borrower exceeded the number of loan modifications allowed under the relevant guidelines.
• The investor who owns the loan does not offer loan modifications as a loss mitigation option.
• Even if a borrower is initially approved, they may be denied later if there is not a clear title to the property. For example, an unresolved lien on the property.

Usually, the best possible outcome in contesting a foreclosure is obtaining favorable modification terms but they are getting increasingly difficult to obtain. On top of being hard to obtain, loan modifications are being offered at market rates, which are significantly higher than the interest rates of many loans in foreclosure. This means if the homeowner agrees to a modification at a higher rate, they will be paying significantly more over the life of their loan.

The longer a homeowner waits to apply for a loan modification, the higher the balance of their mortgage arrears. This can throw off their debt-to-income ratio, leading to a modification denial. Considering these challenges, many homeowners are better off with a more reliable solution to save their house from foreclosure and chapter 13 bankruptcy provides that option.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a powerful tool for homeowners. It allows them to pay back their mortgage arrears through a Court-approved 60-month payment plan. When a homeowner files for Chapter 13 bankruptcy, an automatic stay is put in place, halting all foreclosure proceedings and stopping any scheduled foreclosure auctions. This gives the homeowner the breathing room that they need and allows them to catch up on missed mortgage payments without the immediate threat of losing their home.

In a Chapter 13 bankruptcy case, a feasible plan must be filed with the Court that addresses a debtor’s outstanding mortgage arrears as well as other debts, such as credit cards, personal loans, unpaid taxes, and utility balances. Most debts, including mortgage arrears, are typically paid back interest free. A mortgage default interest rate will also stop accruing once the case is filed. Every month, the debtor pays a bankruptcy trustee, who then pays the claims that were filed in the case, including one for their pre-petition mortgage arrears once the plan is confirmed by the Bankruptcy Court. At the same time, the debtor starts making their regular mortgage payments again, which their lender must accept.

One significant benefit of Chapter 13 bankruptcy is the ability of the debtor to maintain the current mortgage interest rate. At this point in time, many homeowners have mortgage interest rates that are significantly lower than current market rates. This may be due to prior modification or through purchase or refinance when rates were much lower than today’s mortgage climate. By holding onto this lower rate, a homeowner can save a significant amount of money over the life of their loan (compared with a market rate loan modification), which makes much more sense from a financial perspective.

Benefits of Chapter 13 Bankruptcy

While the automatic stay in bankruptcy halts foreclosure proceedings and gives a debtor time to address their financial issues, there are several other benefits to filing for Chapter 13 bankruptcy, including:

1. Easier Process Than Mortgage Modification: Unlike the often frustrating and lengthy process of modifying a loan, Chapter 13 bankruptcy is a more streamlined way to get back on track with your mortgage payments. Mortgage lenders or servicers must accept the payments from the Trustee as well as the ongoing monthly mortgage payments from the debtor. Furthermore, two issues that can lead to a denial of a modification, debt to income and loan to value ratios are not a factor in Chapter 13 bankruptcy. If the debtor can afford the plan, they can retain their property.
2. More Flexibility with Income Sources: Chapter 13 bankruptcy is more flexible than loan modification programs when it comes to considering income. For example, 100% of rental income (as opposed to 75%) and outside financial contributions, such as contributions from family members, can be easily factored into a debtor’s repayment plan. This gives debtors more room in their budgets to manage their payments. Lenders rarely accept contributions as a source of income in qualifying for a loan modification.
3. Reinstates The Mortgage: After completing the Chapter 13 bankruptcy plan, a debtor’s mortgage is reinstated, and they continue forward making payments at the same interest rate.
4. Financial Recovery: Chapter 13 bankruptcy helps, not just with a debtor’s mortgage but with other debts as well. It consolidates their debts into a single, manageable payment plan, which is typically interest-free. A debtor can pay back their credit card balances, personal loans, and even back taxes. This gives them a fresh start and a path toward long-term financial stability.

Additional Options Within Chapter 13

In some cases, there are additional options within Chapter 13 bankruptcy that may help homeowners who may be unable to afford to back 100% of their mortgage arrears within 60 months. These include loss mitigation programs, which offer the opportunity to apply for a loan modification under the supervision of a bankruptcy judge. The loss mitigation programs in Bankruptcy Court are “designed to function as a forum for debtors and lenders to reach consensual resolution whenever a debtor’s residential property is at risk of foreclosure. However, these programs are not available in all Federal districts. For example, while loss mitigation is available throughout the Southern District of New York, in the Eastern District of New York, loss mitigation is only available with the three judges in the Brooklyn Division and none of the judges in the Central Islip Division. A loan modification obtained through the Bankruptcy Court is one way to save a home from foreclosure, but as mentioned above, they are increasingly more difficult to obtain and generally based on current market rates.

Conclusion

Chapter 13 bankruptcy can be an efficient and effective option for homeowners who are struggling to avoid foreclosure. It offers a Court-approved repayment plan, halts foreclosure proceedings, stops foreclosure auctions, and allows homeowners to keep their current mortgage interest rates. The Chapter 13 process is often easier and more straightforward than attempting to secure a loan modification, and it provides a lifeline for those who are dealing with temporary financial setbacks.

Contact The Law Offices of David I Pankin, PC

At the Law Offices of David I. Pankin, P.C., we have been asked many questions about bankruptcy and foreclosure:

• Will I lose my house if I file Chapter 13 bankruptcy?
• Can my house be taken if I file Chapter 13 bankruptcy?
• Can you keep your home if you file for bankruptcy?
• Can I save my home from foreclosure with Chapter 13 bankruptcy?

The fact is that you can keep a home in Chapter 13 bankruptcy and protect it from foreclosure. If you have questions about foreclosure or Chapter 13 bankruptcy, contact our offices today. We have almost 30 years of experience helping homeowners who are facing foreclosure and have helped save thousands of homes along the way. To schedule a free consultation, please call us at 888-529-9600 or kindly complete our easy online webform.