A Foreclosure After Chapter 13 Plan Begins
If a person who is in a Chapter 13 bankruptcy decides their house is costing them too much after their plan has been confirmed, and they decide they want to walk away from a mortgaged house that is underwater, what happens to the deficiency of the mortgage loan not paid off after the eventual foreclosure sale?
The foreclosure laws of your state will determine how a state views a deficiency on a foreclosure sale of property. Federal bankruptcy laws will determine how a deficiency is eventually handled during or after a bankruptcy has been filed, and depending on the type of bankruptcy filed.
There are two types of state foreclosures – judicial and non-judicial. States can use either or both types of foreclosure within their state guidelines when foreclosing on property.
Judicial Foreclosure and Bankruptcy
A judicial foreclosure is where the foreclosure takes place in a state court after a mortgage lender has filed a foreclosure lawsuit to get property back that has been defaulted on the loan. The judicial foreclosure follows the court’s guidelines in seeing to it that the mortgage lender legally takes the property from the owners in a timely fashion.
Non-Judicial Foreclosure and Bankruptcy
A non-judicial foreclosure is an informal way for a mortgage lender to take back property from a homeowner that has defaulted on their loan. Here, a designated agent of the mortgage company or an appointed trustee handles the foreclosure process for the mortgage lender. They must follow prescribed foreclosure laws to carry out the task, and supposedly is a faster and less expensive way to expedite the foreclosure process. Many states use this type of process in conjunction with judicial foreclosure to speed up the process.
Bankruptcy law is an entirely different matter for the foreclosure process. Where foreclosure laws are governed by state courts, bankruptcy laws are governed by federal courts and hold precedence over state laws when it comes to matters of priority.
A Chapter 13 is a wage earner’s plan that allows a filing debtor to make a plan to pay back all or part of unsecured debt. Secured debt payments must be kept current if the filing debtor plans on keeping the asset, and the arrears must be built into the plan. If the debtor wants to surrender the secured asset in a Chapter 13, he need only say so, and the asset will be surrendered to the lien holders for either foreclosure or repossession processing. According to bankruptcy laws, what is owed including any deficiency in a Chapter 13 bankruptcy will be discharged for surrendered property.
In the event a filer changes his or her mind about surrendering property during a Chapter 13, they need only make an amendment request for their change of plans to the court so the asset will be discharged at the end of the bankruptcy process. Any deficiency will automatically be included as part of the discharge.
Foreclosures frequently occur after a debtor defaults on a mortgage loan contract during a Chapter 13. Bankruptcy laws provide for the filing debt to change their mind if their financial circumstances change. Changing a plan during a Chapter 13 is a formal process that requires the filing debtor formally request any changes before the bankruptcy court. It is a good idea to have a bankruptcy lawyer representing you when you have to make these types changes.