For the past two weeks, I’ve written about the issue of timing in bankruptcy cases. Two weeks ago I looked at timing from the perspective of collection by creditors in my blog, How our Minneapolis Bankruptcy Lawyers Know When You Should File. Last week, I looked at timing as a function of the Bankruptcy Code, and talked specifically about timing the filing of a chapter 7 case. This week I want to discuss timing issues with chapter 13 cases.
Chapter 13 is a repayment plan, proposed by debtors and confirmed by the bankruptcy court
People dealing with debt issues who have a regular source of income, who file his or her Chapter 13 Bankruptcy case in good faith, and who propose a feasible plan with be able to have a Chapter 13 repayment plan confirmed. Chapter 13 repayment plans take a minimum of three years (36 months) up to a maximum of five years (60 months) to complete. When the repayment plan has been paid in full, chapter 13 debtors receive a discharge of their debts.
Chapter 13 plans do not, under most circumstances, require that unsecured creditors be paid in full. Chapter 13 bankruptcy cases can help debtors with many different kinds of debt issues, but for the purpose of this blog, I want to focus on two important aspects of chapter 13 that can be of great help to people facing financial difficulties.
Chapter 13 offers a way for people who have defaulted on a car payment to retain his or her car and avoid repossession. Chapter 13 also offers a way for people who have defaulted on their mortgage loan a way to make up the back payments in a monthly payment the debtor can afford. But filing the chapter 13 case at the appropriate time, and not later, is very important. Let’s take a closer look at the timing issues. Let’s start first with mortgage defaults - I will discuss that in detail and then I will touch lightly on car loans (with more to come on car loans next week).
When mortgage defaults happen, lenders have recourse against both the homeowner and the land.
When individuals take out a mortgage to finance the purchase of real estate, the borrower signs both a promissory note, which personally obligates the borrower to pay the mortgage company the mortgage balance, with interest, as well as a mortgage deed, which gives the mortgage company a security interest in the land being purchased. So when payments are missed, a mortgage lender has the option of collecting against the borrower personally, by asking for payment, or foreclosing on its security interest in the real estate owned by the borrower through the mortgage foreclosure process.
In the normal course of business, a mortgage lender is going to start the collection process by making informal contacts with the borrower asking the borrower to become current on payment. Lenders will also send correspondence to borrowers outlining options available to the borrower if making the mortgage payment is difficult, including seeking a modification of the payment terms of the mortgage. However, the lender’s interest is receiving payment, so the focus of the contact will be to collect any overdue payments.
The sad reality is that many borrowers are facing some significant financial challenges, due to a reduction in work hours or an unexpected layoff from work. In other cases, household expenses have spiked due to an unexpected illness or injury. If the loss of income, or increase in expenses is a short-term problem, the programs available to borrowers who are late on mortgage payments might resolve the missed payment issue.
But for other borrowers, the financial problem might be more protracted, and making up missed payments, or putting one or two missed payments on the “back-end” of the mortgage may not be feasible. These individuals do not have the ability to take advantage of programs to make up the lost payments. If that is the case, after the informal contacts made by the lender does not result in the borrower either becoming current or entering into a modification agreement with the lender, the lender will turn over the mortgage collection to a law firm that handles mortgage foreclosure cases.
The first step the law firm will take is to send the defaulted borrower a letter by certified mail
This letter will put the borrower on notice that the mortgage payment is in default and let the borrower know how far he or she is behind. The letter will then tell the borrower that the borrower has 30 days from the date of the letter to make up the missed payments. If the borrower fails to do so, the entire balance of the mortgage will come due and the foreclosure process will begin. This “30 day letter” is an important step in the foreclosure process, and if a borrower thinks that filing a Chapter 13 Bankruptcy case might be a solution to avoid foreclosure, the time is now to sit down with an experienced Minneapolis Bankruptcy Attorney to discuss resolving the mortgage problem through the filing of a Chapter 13 Bankruptcy case.
If a client comes to our office to discuss Chapter 13 at this time, both of us - the lawyer and the client - have sufficient time to collect and document the information needed to put together a Chapter 13 petition, schedules and plan that can resolve the mortgage default and allow a borrower to remain in his or her home without the anxiety of dealing with a mortgage foreclosure sale.While starting the chapter 13 process is preferred at the stage in which the “foreclosure clock” has started to tick (that is, at the time the 30-day letter is received), it is not fatal to a client’s prospects if he or she comes to our office later, provided the foreclosure sale has not yet taken place.
Once the 30-day deadline has passed, if the loan is not current, the lawyer handling the foreclosure sale will schedule a mortgage foreclosure sheriff’s sale. The lawyer will then have the sheriff of the county where the borrower lives serve the borrower with the notice of the foreclosure sale, showing the total balance owed on the mortgage and the date, time and location of the sale. This notice, which is personally served on the borrower, must also be published in the legal newspaper of the county in which the property is located. The notice must be published once a week, for six consecutive weeks prior to the date of the sheriff’s sale.
If a borrower has procrastinated in visiting with a Bankruptcy Lawyer MN after receiving the 30-day letter and now has been served with a notice of the foreclosure sale, that borrower is not out of luck if he or she wants to use Chapter 13 as a tool to remain in the home and resolve the defaulted payments. The borrower can still come in to see a Bankruptcy Attorney and discuss filing a Chapter 13 case to cancel the foreclosure sale and propose a cure for the mortgage defaults. But the client has to understand that he or she is now looking at a hard deadline:
To Preserve home ownership, You must file chapter 13 case before the foreclosure sale takes place
This is a no-exception rule. Clients should see an attorney as soon as possible after a foreclosure sale is scheduled to give the client the best possible chance of filing a Chapter 13 case that will meet the client’s needs.In order to stop a mortgage foreclosure sale, the chapter 13 case must be filed prior to the date and time of the sale. In order to be an effective tool to helping a client regain financial stability and preserve home ownership, the chapter 13 plan must provide for a cure (or pay-back) of the mortgage arrears the client owes at the time of filing.
Remember that when the 30-day deadline expires, the mortgage company will “accelerate” the promissory note - that is, the entire amount of the mortgage, not just the missed payments, will be due. But a Chapter 13 case, filed before the mortgage foreclosure sale takes place, will be effective if all the plan proposes is to pay the mortgage arrears. Chapter 13 debtors can be “in” a Chapter 13 case for a minimum of three years up to a maximum of five years (although high-income debtors will be mandated by the Bankruptcy Code to propose a five-year plan).
During the chapter 13 case, the missed mortgage payments will be made up. And if you understand how this works, you will understand why Chapter 13 is such a vital tool to preserve home ownership: missed payments do not have to be made up immediately - in fact a chapter 13 debtor can make up the missed payments over as much as 60 months. So the debtor that finds herself eight months behind can make up these back payments over a significantly long period of time. All potential chapter 13 clients must be aware of the fact that his or her “ongoing” mortgage payments - that is, the payments on the mortgage that come due after the chapter 13 case is filed, must also be made in a timely fashion. The “ongoing” payments are made by the chapter 13 debtor directly to the mortgage company.
Your Case must be filed prior to the sheriff’s foreclosure sale in order to stop the sale
A client’s home is almost always the most valuable asset the client owns. The home is also an investment - as the years go on, the principal balance of the mortgage is decreased as payments are made and in most cases, the property appreciates in value. So the homeowner who has paid off a mortgage has a source of money in the equity in the home when there is a need for the homeowner for cash. Further, if the homeowner has a family, the home is the “home-base” of family members - a source of structure and security that enhances family life.
There a many reasons for clients to want to preserve home ownership, and chapter 13 is a valuable tool to accomplish this, but clients must act in a timely manner. Because our Minneapolis Bankruptcy Lawyers focuses exclusively on debtor’s bankruptcy practice, we are uniquely positioned to act quickly if clients have delayed visiting us until just before a sale. But our last-minute, “emergency” chapter 13 cases are stressful on our clients and because they are drafted quickly may not be a precise and accurate as we normally expect. So visiting with an Bankruptcy Attorney as soon as the missed mortgage payment becomes a big legal problem is advised. However if you wait until the last minute, there’s no reason not to speak with us - we’ll be better positioned than almost any other Minnesota bankruptcy firm to file a chapter 13 case for you quickly.
The other secured debt that chapter 13 can help with dramatically is car loans
If a borrower has defaulted on a vehicle loan, the lender has the ability to do “self-help” repossession. That is, a lender can, after a car payment has been missed by the borrower, repossess the car and sell it at an auction. Since auction sales prices tend to bring in much lower than retail value, borrowers with repossessed cars normally find themselves owing the lender a “deficiency” - that is, the borrower who has had a car repossessed is legally obligated to continue paying on the original car loan any difference between the loan balance and the proceeds of the auction sale.
But in the same way filing a chapter 13 case “stops” a mortgage foreclosure sale, filing a chapter 13 case will also stop repossession of a vehicle. If the chapter 13 debtor wishes to retain possession of the car long-term, the chapter 13 plan will have to propose either making up missed payments (if the car loan has, at a minimum, more than three years’ of payments remaining) or the chapter 13 plan can propose to pay the entire car loan in full through the chapter 13 plan payments made by a chapter 13 debtor to the chapter 13 bankruptcy trustee. We’ll get into the mechanics of how chapter 13 works with car loans next week.