The question of paying mortgage arrears often comes up on bankruptcy forum websites. A blogging debtor recently posted this question concerning the priority of paying mortgage arrears in a Chapter 13: “If I were to include my mortgage and all of the back payments owed in a Chapter 13, does that payment somehow take priority over my over unsecured debts (credit cards, loans)?”
A Chapter 13 bankruptcy is a type of bankruptcy where the filing debtor makes a 3 or 5 year plan to pay back all or a portion of their unsecured debts. It is commonly called a wage earner’s plan, and you have to have consistent income with a certain amount of disposable monthly income to qualify.
Bankruptcy law sets up priority payments during a Chapter 13. After you have figured your income and taken out your normal living expenses as described by law, the disposable monthly income left is prioritized to pay off your debts. Certain debts, like some tax debts, spousal and child support, trustee payments, and lawyer payments have top priority in the order of payments during the plan. That means these debts must get paid first 100% before any other debts are to be considered for getting paid.
Secured debts, like mortgage and car loans are in the next tier of payments, and if you intend on keeping the assets, must be paid back in full. Mortgage arrears can be built into your plan and will be prioritized with the mortgage loan.
The last tier of payments is made to unsecured debts like credit cards and loans. These debts can be paid off in full or partially, depending on the amount of disposable monthly income available to pay the debts. Any unsecured debts not paid off in a 3 or 5 year pay back plan will be discharged at the end of the bankruptcy.
The good news for the illustrated blogger is that he or she can pay back the mortgage arrears in order to keep their house if they have the income to do so. Say the debtors are making $2000 a month payment on their mortgage but a sickness caused them to get behind in mortgage arrears for nine months. They can initiate a Chapter 13 plan to make the $18,000 mortgage arrears in 5 years at $300 per month. That would most likely be much cheaper than what the creditor may have asked them to pay back in order to catch up.
As long as the filing debtor can afford to and makes the mortgage arrears on time, and can make the $2000 regular mortgage payment, the homeowner can keep the home during the Chapter 13. The credit card debt may or may not have to be paid back, depending on the amount of disposable income left after priority payments have been made.
In addition, a Chapter 13 allows a second mortgage loan that has no equity value in the home to be stripped down to unsecured debt. The second mortgage loan will have to be paid in the plan with the same priority as any unsecured debt.
If you own a home and are in arrears, filing a Chapter 13 can help you in a lot of ways. Consult with an experienced Chapter 13 bankruptcy lawyer before you file.
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