The coronavirus pandemic caused widespread unemployment and loss of business income. As a result, many banks voluntarily offered mortgage deferrals. For the most part, these deferrals end on or before February 28, 2021. At this point, these lenders will start or restart the foreclosure process. Legally, banks may foreclose on a mortgage after one missed payment.
People who are in this situation have several options. The bank might offer a loan modification. A loan modification basically defers delinquent payments until the end of the loan. Unfortunately, banks frequently deny these requests, citing obscure things like an unfavorable debt-to-income ratio. Some companies offer financial mediation. But such efforts rarely produce results.
Chapter 13 bankruptcy could be a better option in many cases. As outlined below, Chapter 13 has immediate and long-term benefits for distressed homeowners. Additionally, a federal judge supervises every aspect of a bankruptcy case. So, even the most unruly moneylenders must be on their best behavior.
Bankruptcy and the Automatic Stay
Technically, civil judges have the power to stop foreclosures. But they only take such actions in rare cases. Usually, the homeowner must show lender fraud or a serious violation of the National Mortgage Settlement.
Section 362 of the Bankruptcy Code is different. This provision, which usually kicks in as soon as debtors file their voluntary petitions, automatically stops things like:
- Wage garnishment,
- Creditor harassment,
- Eviction, and
- Utility shutoff.
These debtors do not have to show fault, negligence, or anything else. The Automatic Stay is, well, automatic.
Proper notice is usually key. Section 362 only applies to mortgage servicing companies and other creditors who receive actual notice. Mortgages are often bought and sold in bundles. So, there is a good chance that the servicing company has changed several times. These companies are legally required to give notice, but they often do not.
Thus, a Philadelphia bankruptcy lawyer often has some additional homework to do. Unless the current servicing company receives actual notice, a foreclosure sale could proceed. It’s usually possible to undo these wrongful sales. But the process is time-consuming, to say the least.
The Protected Repayment Period
Homeowners who were unable to make mortgage payments during 2020 might be tens of thousands of dollars behind. Only Chapter 13 gives these homeowners up to five years to make catch-up payments. During this time, because of the Automatic Stay, creditors cannot even contact debtors.
Each month, these debtors make a debt consolidation payment. The trustee (person who oversees the bankruptcy for the judge) then divides this payment among all allowed claimants. This category usually includes secured creditors and a few unsecured creditors.
As long as the monthly amount retires the delinquent debt by the end of the protected repayment period, judges almost always approve them. So, the bank must wait for its money, just like everyone else.
Financial circumstances often change during the protected repayment period. These circumstances could get better or worse. In these cases, a Philadelphia bankruptcy attorney can usually adjust the debt consolidation payment’s amount. Conversion to a Chapter 7, which ends the repayment obligation, is an option as well.
Long-Term Affordability Options
Cram downs and strip offs probably sound like obscure concepts to many people. But in the home mortgage context, they could save owners thousands of dollars. And, these options are only available inside bankruptcy.
A cram down substitutes the fair market value for the lien value. Assume Rick owes $100,000 on a house which is only worth $50,000. If he makes accelerated payments during a Chapter 13 and pays the current fair market value, he could own the home free and clear. The bank must forgive the remaining loan balance.
Cram downs could also be available for motor vehicles. Typically, motor vehicles lose most of their value after a year or two. So, most people are upside-down on these loans. Chapter 13 could offer a way out.
A strip off is another kind of lien elimination. Assume A.J. bought a $200,000 house with an 80/20 mortgage (one note for $160,000 and one for $40,000). When he files bankruptcy, his house is only worth $160,000. As a result, the junior lien is now a dischargeable unsecured debt. The home’s value is not high enough to secure both obligations.
Chapter 13 stops foreclosure and often makes your home more affordable. For a free consultation with a bankruptcy lawyer in Philadelphia, contact Bankruptcy Done Right. We routinely handle matters in Philadelphia County and nearby jurisdictions.