How Will My House/Mortgage Be Treated In A Chapter 13 Bankruptcy? – 4 Things To Know

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In A Nutshell

1) Pay Your Regular Monthly Mortgage Payment

2) Pay Amount You Are Behind On Mortgage

3) Option: Surrender House And Discharge The Mortgage

4) What If Your Home Has No Mortgage?

In More Detail

Your home is one of your most important and largest assets.  You certainly will want to know all of the options you have regarding your home when you file a Chapter 13 bankruptcy.  Below I discuss how your house and mortgage will/could be treated in Chapter 13.  But, I would also like to look at your specific situation to tell you the exact options you have regarding your home/mortgage in a Chapter 13.  Complete the online intake form to receive my free analysis of your situation. 

1) Pay Your Regular Monthly Mortgage Payment

If you desire to keep your home, then you need to continue to pay the normal monthly mortgage payment.  Filing a Chapter 13 does not change or alter your mortgage’s monthly mortgage payment (in most situations), and ongoing payments must be made if you intend to keep your home. 

The monthly ongoing mortgage payments will either be paid directly to the mortgage company by you or disbursed to the mortgage company by the Chapter 13 Trustee who receives the payment through your monthly bankruptcy payment.  

If you are NOT behind on your mortgage payments entering into your Chapter 13 and have not been behind within 6 months prior to your Chapter 13 being filed, then you will have 2 options regarding how your monthly mortgage payment is made.  First, you can choose to pay the mortgage directly to the mortgage company and not through your Chapter 13 payment. I often get told by potential bankruptcy clients who are not behind on their mortgage that they “do not want to include their house in the bankruptcy.”  I think this phrase has different meanings to different people, but I always have the same response:  “Everything you own, all of your assets must be listed or ‘included’ in your bankruptcy…including your mortgage.  It does not mean that you will lose your house or that your mortgage will go away if you intend to keep your house. Through your bankruptcy petition we will tell the Court and the creditor what you intend to do with the house and mortgage.” 

Second, you can choose to pay the ongoing mortgage payment through your Chapter 13 payment if you desire.  Some individuals like this because it makes them have 1 debt payment (i.e. their Chapter 13 payment) each month instead of having to pay the Chapter 13 payment + the mortgage payment. 

If you are behind on your mortgage payments entering into the Chapter 13 or have been behind at any time within 6 months prior to your Chapter 13 being filed, then you must make your monthly mortgage payments through your Chapter 13 payment.

2) Pay Amount You Are Behind On Mortgage

Chapter 13 can be used as a mechanism to stop a mortgage company from foreclosing on your house.  Through your Chapter 13 bankruptcy payment, you will pay your regular monthly mortgage payment AND the amount you are behind on your mortgage (aka “arrears”).  At the end of your Chapter 13 you will have paid all regular monthly mortgage payments that came due during your bankruptcy and all arrearage owed at the time your case was filed.  You will no longer be behind on your mortgage and will resume making your mortgage payments directly to the mortgage company until your house is paid in full. 

For example: your mortgage payment is $800 and at the time of your bankruptcy filing you are 3 months behind (arrears = $2,400).  Your bankruptcy payment will include the following to be paid to the mortgage company (note that your full bankruptcy payment may include payments to other things as well):

At the end of your bankruptcy, the $2,400 in arrears will be paid in full, you will no longer be behind on your mortgage, and you will resume making the $800 regular monthly mortgage payment directly to the mortgage company.  

3) Option: Surrender House And Discharge The Mortgage

In a Chapter 13 you will have the option to surrender your house and discharge your liability for the mortgage.  This will not require you to pay the normal monthly mortgage payment and the arrearage owed on the mortgage through your bankruptcy payment.  

In most Chapter 13s the option to surrender your house is your choice.  You get to decide at the outset of your case (or during your case if there is a change in your circumstances) whether or not you want to keep your house.  If your monthly mortgage payment is too large or you owe too much in arrears, then it may be unaffordable to keep your house and pay for it through your Chapter 13 payment.  Surrendering your house and not having to pay for the mortgage could be your best option.

Practically speaking when you state in your bankruptcy schedules that you are going to surrender the house, you will need to find a new place to live within the month following your case being filed.  The mortgage company will want to take your house as soon as possible. They will actually foreclose upon your house, sell it, and use the proceeds to apply toward the mortgage. Any amount still owed after the foreclosure sale (called the “deficiency”) will be an unsecured debt, dischargeable through your Chapter 13 bankruptcy.  Keep in mind that your credit score will not be negatively affected by this type of foreclosure. The mortgage company will not be allowed to report this foreclosure on your credit because of your bankruptcy.

4) What If Your Home Has No Mortgage?

If your home has no mortgage, then obviously there is no mortgage to be paid through your Chapter 13 payment.  Your home is certainly one of your largest and most important assets and something you want to make sure is protected.  A Chapter 13 will allow you to keep your home, but the value of your home could result in your Chapter 13 payment being higher.

The Bankruptcy Code has provided certain “Exemptions” that allow an individual in bankruptcy to own up to a certain value of “goods” before their bankruptcy is affected by the value of their goods.  (Read more about Exemptions here). To say it a different way: if the value of your stuff is too high, then your Chapter 13 bankruptcy payment will increase.  

The Code has created the “Homestead Exemption” to protect your home.  If you own your home by yourself or jointly with a non-spouse, then you can exempt up to $35,000 of equity in your home.  If you own your home with your spouse, then combined you can exempt put to $70,000 of equity in your home. Any equity above the exemptable amount will cause your bankruptcy payment will be higher with a higher percentage being paid to your unsecured creditors.

For Example:  You and your spouse file a Chapter 13 and own your home together which has no mortgage against it.  The home is worth $100,000. Together you and your spouse can exempt $70,000 of the equity in the home, leaving $30,000 unexempt.  Your Chapter 13 payment will include $30,000 being paid to your unsecured creditors over the next 5 years ($30,000 / 60 months = $500/mo).

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