One of the benefits of Chapter 13 bankruptcy is that it allows you to reorganize your debts. That means that if you have gotten behind on your mortgage, you can get caught up over the course of your three to five year Chapter 13 payment plan. Chapter 13 will also allow you to convert a secured second mortgage or home equity line of credit into an unsecured credit. This process is often called “stripping a second” and at the end of your repayment plan should leave you owing closer to what your home is worth.
But three to five years can be a long time. Things can change, especially income. The foundation of your Chapter 13 payment plan is your household income. In order to keep a home that you’ve gotten behind on, you have to have enough income to pay your regular mortgage payment and pay off the amount you’re behind over the course of your payment plan.
When clients first come into my office to explore Chapter 13 as a way to keep their home, they are eager to come up with a solution, even when keeping it doesn’t make financial sense. They file Chapter 13 anyway, even if it means just making ends meet.
Again, things change, and it isn’t unusual for clients to realize a year or so later that keeping the house is financially impractical. They call me and want to know if they can now let the house go.
That answer is somewhat complicated. And in Colorado, it can even depend on which bankruptcy court judge you’ve been randomly assigned.
The short answer is, yes, you can change your mind about keeping your house after you file Chapter 13. At that point, the lender will pursue foreclosure proceedings, unless you can persuade it to let you do a short sale or a “deed in lieu of foreclosure”. The issue at that point is determining whether or not you’ll still owe the lender any money once the house is sold, which is the typical situation.
While the majority of Colorado bankruptcy court judges will let you modify your Chapter 13 plan to pay the deficiency you owe on your mortgage, Judge Campbell recently issued an opinion denying such a modification.
In In re Kurtz, the debtor’s scenario was just what I described above. Despite even the Chapter 13 Trustee urging Judge Campbell to allow the debtor to modify his plan to take care of the deficiency, the judge denied the debtor’s request.
Judge Campbell’s reasoning was that when the plan was originally confirmed, the lender’s rights had been secured and could not be changed post-confirmation. In denying the request for modification, the debtor will still be on the hook for any deficiency that he still owes the lender. At this point, he has two options: pay what he owes to the lender, or let his current bankruptcy case dismiss and file a second case. I assume that since he requested a modification, the debtor wasn’t eligible for a conversion to a Chapter 7 bankruptcy. When he files a new Chapter 13, his three to five year payment plan will start all over.
Judge Campbell’s decision puts the debtor in a difficult position. However, one has to wonder if this situation could have been avoided if the debtor had taken a good, hard and objective look at his financial situation when he decided to file bankruptcy in the first place.
You can read Judge Campbell’s opinion here.
Chapter 13 bankruptcy may be a good option if your income is over the median income for your size, or if you need to get caught up on your mortgage. If you have questions about whether it may be a good option for you, we hope you’ll come in for a free, no-obligation consultation with an experienced bankruptcy lawyer. You can call 303.331.3403 to schedule an appointment or use our online scheduling system.