Saving your home ranks high on the list of reasons people file Chapter 13.

The automatic stay stops foreclosures; Chapter 13 gives you time to fix the problem.

Powerful stuff.

But the stay and more time, alone, isn’t enough to save the day if you run afoul of other rules, written and unwritten, about homeownership in Chapter 13.

So, here’s your manual for Keeping Your Home Through Bankruptcy.

Read your Chapter 13 plan

The basic premise of Chapter 13 is that you continue making payments on your home loan during the plan.  Typically, you make the payments that come due after you file, plus catch up on any missed payments via your payments to the Chapter 13 trustee.

Every Chapter 13 district does things a little differently  but they all treat post filing payments in one of two ways:

• either the homeowner makes the payments directly to the mortgage servicer, just as if there were no bankruptcy.
• or, the on going payments are made to the Chapter 13 trustee, who in turn pays the mortgage servicer. (Those are called conduit payments.)

Make sure you know how it works in your district,  and when your first payment after filing bankruptcy is due.

Keep track of payments you make

Future disputes about whether you made payments directly to the servicer are virtually certain.  Arm yourself with a paper record.

You want your paper trail to be complete and retrievable.  Chances are, the servicer’s records won’t be as good.

I suggest clients pay by personal check (so you get a cancelled check) and transmit that payment by a means that gets you a receipt showing delivery.  With a receipt, you can monitor whether the servicer is promptly crediting your payment, as they are required to do.

Any automatic payments from your bank account or even your ability to pay electronically will undoubtedly be canceled by the servicer.

Compare monthly statements

A new federal rule requires servicers to continue sending you monthly mortgage statements.  That’s a welcome change.

More on the new mortgage statement format

The rule breaks out what is happening with your loan, both as to any pre-bankruptcy default and as to the post-filing payments.

Check out the statements to see if they are consistent, and save them for support in case there’s a dispute in the future.

Watch for payment changes

Your monthly payment on your home loan may change during the Chapter 13.  Escrow amounts for taxes or insurance may change; your loan may have an adjustable rate, or a time-limited interest only feature.

Bankruptcy rule 3002.1 now requires the servicer to give you advance notice of any change in the monthly payment you must make.  If you are in a conduit district, where the trustee makes the on-going payment, ask your attorney how increases in payments are handled.

The rule also requires the servicer to disclose any fees, expenses or charges that it adds to the loan balance during your case.  The disclosure must be made to you, your attorney and the court within 180 days of the expense being incurred.  You have the right to challenge the expense and have a hearing on whether it’s truly owed.

Pay your property taxes

Depending on your loan terms, you may pay property taxes directly to the local taxing authority.  Staying current on property taxes is a condition of being in good standing on your loan.

Know whether your property taxes are escrowed and thus included in your monthly payment, or whether you pay them directly.

If you pay property taxes directly, make it a habit to set aside 1/12th of your annual property taxes when you make your mortgage payment, so you don’t fall behind.

Avoid suffering a motion for relief from stay

The automatic stay is automatic, but it’s not necessarily forever.

If you fail to make required ongoing payments or fail to keep the property insured, the servicer can file a motion asking the court to lift the stay and allow it to foreclose.

More about motions for relief from the stay

Even if you manage to get a deal to cure any defaults, a motion to lift the stay will add to the lender’s attorneys fees, which they will want to collect from you.  And that’s on top of whatever you have to pay your own attorney to protect your property.

Don’t go there:  stay current.

Deduct the mortgage interest you pay

A large part of most mortgage payments is made up of interest on the loan balance.  That interest and any property taxes you pay to the lender are probably tax deductible.  But for reasons I can’t explain, servicers don’t give you a tax form 1098 showing the deductible payments you’ve made or the trustee has made on your behalf.

Follow our how-to on calculating your deduction and assembling the records to support your claimed deduction.  If you don’t do it, you can be sure the IRS won’t do it for you.

Reducing your income tax bill frees up money to make your plan payments.

Heads up and keep your house

This post bankruptcy to-do list isn’t complicated but it is important.  Armed with knowledge of the possible pitfalls, you can head off trouble and sail through Chapter 13.

More

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If you can’t make your plan payments

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Saving a house from foreclosure is the single reason most people file bankruptcy.

Bankruptcy stops foreclosure- that’s a given.

But then what?

How can bankruptcy save the house,  rather than just putting off the inevitable loss?

The mortgage lender has a lien on the house, and liens aren’t discharged in bankruptcy.

So, how does bankruptcy help?  Meet Chapter 13 of the Bankruptcy Code.

Chapter 13 bankruptcy is the chapter of choice if your goal is to keep living in the house, as opposed to selling it to realize equity or to avoid the credit hit of a foreclosure.

Chapter 13 imposes a payment plan on lender

Chapter 13 is built to allow the homeowener to cure defaults on long term debts like mortgages.

Gone is the ability of the lender to refuse to take catch-up payments or to insist on cure in a single payment.

This is federal law, and the homeowner is at the helm of this ship.

The homeowner in Chapter 13 proposes a plan for payments to the Chapter 13 trustee.  The trustee, in turn, pays creditors according to the plan.  The usual distribution scheme pays secured claims, like home loans, first.

So, if you are, say, $24,000 behind on your mortgage, your plan can provide that you pay the trustee a monthly payment that catches up on that default.  Chapter 13 plans last a minimum of three years and a maximum of five years.

Your plan will need to provide that you make the on going payments on the mortgage as well.  Each district has its own protocol as to whether you write the check to the mortgage lender for ongoing payments or whether you pay the trustee, who pays the lender.

Once your plan is confirmed, the lender is required to accept the payments.  Absent some post filing breach on your part, the lender is unlikely to have any way to push back against the payment plan.

Trustee challenges to confirmation

Because the confirmed Chapter 13 plan has such power, both the Chapter 13 trustee and the mortgage lender have opportunity and incentive to object to your plan.

The trustee’s objection is often focused on feasibility.  Does your projected budget show that you can pay enough into the plan to do what’s required?

Remember that the amount necessary to fund the plan is not just the $24,000 that our hypothetical debtor owes on the mortgage.

The Chapter 13 trustee gets a commission on the money she handles in the case.  So, to get $1000 to the mortgage lender, you have to pay the trustee $1100, where the trustee’s commission is the 10% maximum.

Also, if you owe priority taxes, the Bankruptcy Code requires that those taxes be paid in full over the life of the plan.  Likewise,  any delinquent family support claims must be paid in full.

So, the total payments to creditors through the plan may need to cover other creditors as well.

The trustee will look at the total amount your plan provides over the life of the plan and comparing it to your projected income on schedules I and J.  Does it look like you can pay your current living expenses and the amount required by the plan?  If you propose to increase plan payments in future months, is there reason to think you will have the money to do that?

If not, your plan may not be feasible.  If it’s not feasible, it doesn’t get confirmed.

Mortgage creditor fights back

The mortgage creditor has standing to oppose confirmation as well.

Even if the secured creditor doesn’t challenge feasibility or good faith, both required for confirmation, the secured creditor has another, less direct weapon.

When you file bankruptcy, the secured creditor gets to claim not only the missed mortgage payments, but any money the lender has advanced for taxes or insurance.  And, they may have an escrow shortage projected for the current year’s payments.  That’s not to mention foreclosure costs and other fees.

So the lender’s claim may be larger than you expected.

The beauty of Chapter 13 is that the lender has to make full disclosure of those claims and you get to challenge whether the accounting is correct.  You can also challenge whether the fees sought are really allowed by the mortgage.

Mortgage check up at plan’s end

So let’s assume that you get your plan confirmed and faithfully make all the payments required.

New bankruptcy rules work to make sure that you emerge from Chapter 13 fully current on your home loan.

Bankruptcy Rule 3002.1 requires a lender secured by a principal residence to give notice to the court, the trustee and the homeowner of payment changes that occur during the case.

Also, if the required escrow payment changes, or any fees get added to the loan during the case, the lender has to file a notice describing the change.

And the homeowner can challenge changes or additions to the debt.  If it doesn’t get sorted out, a judge will look at the situation and make a ruling.

After the last payment to the plan, if the lender contends you aren’t fully current on the loan, it has to file a detailed accounting showing how much it claims is unpaid.  That accounting is subject to challenge.

Debtor’s rights after 13 is over

One of the few good things included in the 2005 amendments to the Bankruptcy Code, in my opinion, are the provisions that make it a violation of the debtor’s discharge to improperly credit payments made pursuant to a Chapter 13 plan.

All too often, the lender or mortgage servicer either has two sets of books on a loan, or the entries it has made for payments during the plan get altered after the Chapter 13 is over.

Bingo, the lender now claims the borrower is in default, and foreclosure looms.

The bankruptcy court is now a forum for challenging those contentions and getting redress, including the borrower’s attorneys fees to make it happen.

Chapter 13 saves houses

The power of Chapter 13 goes far beyond the automatic stay in giving homeowners a chance to keep their homes.

Not only does it get the homeowner some law to counter balance the endless rights of the lender in the loan documents, it gives the homeowner a referee in the form of a bankruptcy judge who can resolve disputes.

Because bankruptcy judges over the last decade have seen some much of the mortgage meltdown and the deterioration of mortgage servicing up close, they are familiar with the problems and less and less tolerant of lender abuses.

Chapter 13 can be a struggling homeowner’s lucky number.

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Our best advice on keeping your house

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