Debtors seem to whip out their pistols and shoot themselves in the foot with increasing regularity.
Just when their goal of keeping the house was within reach, had they paid attention, they lose it all.
It happens when debtors don’t hold up their end of the bankruptcy bargain.
And at the end of the day, or the end of the plan, they get none of the benefits they sought through bankruptcy.
How does that happen?
Chapter 13 saves houses
The overwhelming majority of Chapter 13 cases in the Bay Area are filed to save a house.
The homeowner needs to catch up on payments, or more frequently, needs a loan modification in order to keep the house.
The Bay Area bankruptcy judges have developed procedures to confirm Chapter 13 plans, and get money flowing out to creditors, while a loan modification is under consideration. If there is anything we know about loan modifications, it’s that they take time and persistence.
One of the provisions of the Chapter 13 plan that the debtor proposes for confirmation by the court addresses how the mortgage lender will be paid while we wait on a loan modification.
The plan might provide that the debtor will make the regular payment, according to the loan terms, directly to the lender in the meantime.
Or, the debtor may propose to make an ongoing payment to the mortgage lender calculated according the the HAMP formula, which says that housing costs should be no more than 31% of a person’s gross income.
So, the HAMP payment to the lender works out to be 31% of monthly income, less property taxes and hazard insurance.
Whichever approach the debtor chooses to deal with the current mortgage payment, it’s set out in the plan, along with the monthly payment the debtor will make to the trustee toward other kinds of debts.
Once a plan is confirmed by the judge, it binds all parties, creditors, trustee and the debtor. See §1327.
Only some debtors seem to forget their part of this deal. They don’t make the ongoing payments and don’t modify their plans to match their behavior.
Confirmed plans when loan modification denied
Another variation on our Bay Area plan is the plan provision that says “if I don’t get a loan modification, I will immediately modify the plan or surrender the house”. I’m paraphrasing the language but the idea is clear: if I can’t modify the plan, I’ll present an alternative plan to the court.
And then the homeowner doesn’t get a modification, and doesn’t present another plan.
And apparently expects good things to happen despite the failure to live up to his post bankruptcy promises.
Discharge depends on plan performance
The debtor in a Chapter 13 gets a discharge “after completion of all payments under the plan”. §1328.
The payments “under the plan” include those that the debtor undertook to make directly, rather than through the Chapter 13 trustee. (In the Northern District of California, we don’t do “conduit plans” where even the post filing mortgage payments are made to the trustee.)
When it comes out that the debtor hasn’t made the on going payments or hasn’t gotten a loan modification, more and more Chapter 13 trustee are recommending that the case be closed without a discharge, since the debtor failed to meet his promises made in bankruptcy.
Facing up to a change of heart about a house, or the painful failure to get a loan modification, seems tough at the time.
What debtors seem to be missing is that all the non-house benefits of a bankruptcy discharge are squandered if the Chapter 13 gets closed without discharging those debts.
The other factor that is probably not obvious to the distraught homeowner is that foreclosure does not always follow immediately from the announcement that the debtor elects to surrender the house.
Even when we want lenders to foreclose on unwanted property, they don’t. Or don’t very quickly.
It is not as though the debtor will be immediately homeless if they admit it isn’t working out.
This is my clarion call to debtors:
- Keep your bankruptcy lawyer in the loop about mortgage payments and loan modifications.
- Keep a copy of your Chapter 13 plan handy and review what you’ve promised to do in exchange for the protection of the automatic stay and the discharge at the end of the case.
Your lawyer can’t help you if you keep secrets.