When a homeowner files Chapter 13 bankruptcy

Many people in Arizona have real concerns about what will happen to their home in the event they file for bankruptcy. Like most homeowners, filers may have one or more mortgages on their homes. Those mortgages may be seriously delinquent or they may have already received a foreclosure notice but the home has not yet been auctioned.

In the event a person is eligible to file for Chapter 13 bankruptcy, doing so may help stop foreclosure proceedings. Unlike Chapter 7, which is a total liquidation bankruptcy, Chapter 13 is a type in which the debtor will enter into a repayment plan. The plan, which will last between three and five years, may allow the debtor the ability to stretch out the mortgage delinquencies for the entire plan, thus catching up on the mortgage in the process.

In the event the debtor has a second mortgage lien on his or her property, the trustee may convert the second mortgage holder's interest into an unsecured one. Trustees normally do this when people are upside down in their homes or when they have very little or no equity in the property. At the end of the plan, the remaining balance of the second mortgage will be discharged, and the debtor will no longer be obligated to pay it.

Chapter 13 can provide an overwhelmed debtor with debt relief. The person will be given the ability to reorganize debts, catch up delinquencies on priority debts and possibly save their home in the process. People who are facing foreclosure but who are also income earners may be eligible to file under this chapter, and they may want to consult with a bankruptcy attorney regarding their options.

Source: SF Gate, "What Do Mortgage Companies Do With Chapter 13 Bankruptcy?", M.C. Postins, accessed on Jan. 19, 2015

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