As a general rule, we do not advocate what is sometimes referred to as state-court "foreclosure lawsuit defense" as a method of saving a home. That does NOT mean you shouldn't ever consider hiring a lawyer to defend a foreclosure action in state court; it just means that in most cases we find Chapter 13 to be cheaper, quicker, and better.
Just What Is Chapter 13?
Chapter 13 refers to the 13th Chapter of Title 11 of the United States Bankruptcy Code. (The other chapters that you have probably heard about are Chapter 7 liquidation and Chapter 11 reorganization.)
Chapter 13 allows individuals with a sufficient regular income and other qualifications to consolidate their debts and keep their property.
Chapter 13 Plans are administered by a trustee appointed by the U.S. Department of Justice and supervised by the U.S. Bankruptcy Court.
Chapter 13 can sometimes give you the opportunity to temporarily stop a foreclosure on your house while you are working out a Plan to get caught up on your mortgage and other debts. You must resume payments on your monthly note right away, and you may take up to five years to "cure the default" (pay back the amount that you are in default on your mortgage).
Chapter 13 eliminates high interest on unsecured credit card debt and stops, at least temporarily, all collection activity by most debt collectors, including wage garnishments and phone calls.
Chapter 13 can make provision for payment of income taxes and student loans.
Chapter 13 may be just what you need to break out of the cycle of debt and delinquency that has snowballed in today’s economy.
How Does Chapter 13 Work?
Chapter 13 is a form of bankruptcy. You must prepare and file pleadings in federal bankruptcy court setting forth the amount of your income, expenses, assets, and liabilities. You must also prepare and file a Plan for dealing with your mortgage arrears and all of your other debts.
Your Chapter 13 Plan must provide that you pay your Trustee an amount that will allow him to distribute to each and every one of your creditors at least as much as they would receive had you filed a Chapter 7 bankruptcy. To keep property that is in a foreclosure, you must also "cure the default" on the mortgage and make all future monthly payments in full and on time.
Who and What is the "Trustee"?
Your Chapter 13 Trustee is a federal government official who is supervised by the US Department of Justice and the US Attorney. You (or your employer) send monthly payments to the Trustee based on the type and amount of debts that are included in your Plan.
What does the Trustee do with the money I send him every month?
The Trustee pays your past-due bills, including but not limited to your mortgage arrearages and all of the other debts, attorneys' fees, and administrative expenses that you have provided for in your Plan. It's in some respects like a bill consolidation loan.
How about an example?
Let's say that your mortgage note is $1,225 per month, and that you are ten months in arrears. Assume that your late charges are $75 per month, and assume also that your mortgage holder forecloses on your mortgage and incurs court costs of $2,500 and attorneys' fees of $900 (a foreclosure proceeding is very expensive, and it ultimately comes out of your pocket). The amount of your default is calculated as follows:
Without a Chapter 13, or some satisfactory arrangement with your lender, you would have to pay the entire $17,100.00 in full in one lump sum to stop a foreclosure sale of your property.
With a Chapter 13, you are given up to five years to "cure the default," that is, you are allowed to pay back the $17,100.00 (sometimes with interest) in 60 monthly installments of $285.00 net to your mortgage holder. You must also start making and stay current on all your future monthly mortgage payments as they come due.
What about my other bills?
You must continue to pay taxes, insurance, utilities, and future home mortgage payments in full and on time, but you can usually put most of your other debts into your Chapter 13 Plan. You may even be able to modify and reduce the monthly payment on your car or truck note, and get a breather on some student loans.
And some debts, such as certain taxes, alimony and child support obligations, and co-signed debts, may be entitled to special treatment in your Chapter 13 Plan.
How much and how often do I have to pay the Trustee?
Calculating your monthly payment is complicated. You usually have to pay the Trustee all of the "projected disposable income" you receive during your “applicable commitment period,” as those terms are defined in the bankruptcy code, but always at least the Chapter 7 “present liquidation value” of your non-exempt assets. You must make your Plan payments at least monthly, and if you miss payments your case may be dismissed.
What if I don't have enough money to pay everyone I owe?
If your Plan is confirmed by the court, and if you make all the payments called for in your Plan and are otherwise eligible for a discharge, your unpaid, unsecured, dischargeable debts are forgiven. However, to save your property from a foreclosure sale, you must still "cure the default" and make all future monthly mortgage installments as they come due, in full and on time.
Remember also that some liens survive Chapter 13 and can be enforced by a creditor after your case is closed unless the liens are paid or eliminated in your Plan.
How much does a Chapter 13 cost?
Probably a lot less per month than the total you are paying now, because Chapter 13 eliminates monthly credit card payments and most monthly installment payments on unsecured debt.
Attorney's fees for a routine “no-look” Chapter 13 are currently set by the court at $4,000.00 or $4,500.00 for a "conduit plan", plus additional charges for Plan modifications and extra work. Filing fees are currently set at $313 and usually (but not always) must be paid in advance, directly to the clerk of bankruptcy court. The Trustee's fee is 10% of your total debt paid through the Plan, and is deducted by the Trustee off the top of each monthly payment which you make.
Additionally, you will incur the cost of pre-bankruptcy credit counseling and pre-discharge debtor education through an approved agency of your choice, and you may want to order a three-bureau credit report and federal income tax return transcripts. You may also need a recent Broker’s Price Opinion and/or a formal appraisal of the value of your home or other real estate from the broker or appraiser of your choice.
How much of the attorneys' fees are due up front?
Sometimes as little as ZERO! Very few Chapter 13 attorneys require the full amount up front. They understand that that all of their clients are in severe financial distress and usually can’t come up with the entire fee in a lump sum. Most will try to work with you on a payment plan.
If you qualify, all or part of your attorney's fees may be put in the plan and paid by the Trustee. An attorney has the right to charge the entire fee up front, but you have the right to shop around.
How much does it take to start the paperwork?
Most attorneys charge a minimal work-up fee, and you usually have to pay at least the actual out-of-pocket cost of your credit reports and the credit counseling course that is required by law.
How much more does it take to complete the paperwork and file my case?
At a minimum you must additionally pay the filing fee ($313) in full to the court unless you qualify for a waiver or installment plan. Your attorney may also require a pre-payment of all or a part of the balance due on his or her attorney’s fee.
Sounds too good to be true.
Well, it just might be. Chapter 13 is not for everyone. In some cases it could be worse than having never filed at all. A Chapter 13 is complicated and expensive. If your credit hasn't already been ruined by foreclosure proceedings, a Chapter 13 will finish the job. And if you don't make all of the payments called for in your Plan, your case can be either dismissed by the court or converted to a Chapter 7 bankruptcy.