The loss of your home to foreclosure is a devastating prospect. However, Pennsylvania homeowners facing foreclosure have a potential lifeline in Chapter 13 bankruptcy. By leveraging the benefits of Chapter 13 bankruptcy, homeowners can halt or prevent foreclosure, catch up on back payments, and keep their homes. For many struggling homeowners, Chapter 13 can not only help save their property but also chart a path toward financial stability.
Chapter 13 bankruptcy allows individuals with regular income to reorganize their debts and establish a manageable repayment plan. Most Chapter 13 plans last three to five years. Unlike Chapter 7, you can use Chapter 13 to catch up on back payments on secured debts, such as mortgage and car loans, over time. The typical Chapter 13 plan lasts from three to five years.
Filing for Chapter 13 bankruptcy triggers an "automatic stay," which immediately halts foreclosures, lawsuits, and debt collections. In other words, even if the foreclosure process has already started, it must stop immediately. The stay provides breathing room for debtors to restructure their finances.
Quick Note: You can stop a foreclosure action by filing a Chapter 13 case at any time before the sheriff's sale. Indeed, our firm has filed many emergency petitions with a sheriff's sale pending soon. However, it is best not to wait until the day before the sale, as there are some things you must do before filing, and it may be challenging to find an available attorney. (After the sale, it is too late because Pennsylvania has no right of redemption.) Our firm has filed many emergency petitions.
Chapter 13 bankruptcy allows homeowners to cure mortgage arrears by including them in a repayment plan (the "Chapter 13 plan"). The plan enables individuals to spread out missed payments over a manageable timeline while continuing to make regular mortgage payments. (This applies to car loans and other secured debts as well.) This plan is tailored to the debtor's income and expenses and must be approved by the bankruptcy court. By keeping up with this plan, homeowners can gradually clear their arrears and keep their homes.
Unlike Chapter 7 bankruptcy, which may require liquidation of assets under some circumstances, Chapter 13 bankruptcy allows homeowners to maintain ownership of their real and personal property, provided they qualify and comply with the repayment plan.
Debtors can also deal with other debts, such as credit cards, medical debt, taxes, etc., through the Chapter 13 plan, often by paying back far less than the full balances. In most cases, any unsecured debt not paid in the plan is discharged at the end of your Chapter 13 case. The advantages over Chapter 13 can be significant in the case of some debts, such as back income taxes and car loans.
Quick Note: Most Chapter 13 filers pay back only a portion of their unsecured debts, such as credit cards, personal loans, medical debts, tax penalties, etc. How much you pay depends upon your income, expenses, and assets. In our Greater Philadelphia area bankruptcy practice, we have confirmed Chapter 13 cases where the debtors pay back as little as 1% of their unsecured debts.
In Pennsylvania and a few other states, if you are a married couple who purchased your home together, most of your individual creditors cannot get to your joint marital property. Thus, you can effectively discharge your individual debts in Chapter 13 and pay only your joint debts, assuming you are filing jointly with your spouse. (The use of tenancy by the entireties in Chapter 13 is a complex area of law and requires an experienced and knowledgeable bankruptcy attorney.)
Chapter 13 bankruptcy offers another key advantage: lien stripping. When a debtor's house is worth less than the primary mortgage, the bankruptcy court may 'strip' or remove second and later mortgages, HELOCS, etc., treating them as unsecured debts. These debts may be partially repaid or even entirely discharged at the end of the bankruptcy term, making the debtor's financial situation more manageable.
Depending upon the amount of equity covering them, debtors can often avoid (remove) judgment liens and discharge all or part of the underlying debt.
Chapter 13 is complex, and the assistance of an experienced Pennsylvania bankruptcy attorney is crucial. However, with proper planning and guidance, Chapter 13 bankruptcy can offer homeowners a fresh start, not just with their mortgage loans but also with their overall financial health.