Chapter 13 bankruptcies are a true to form reorganization, and the debtor is in a repayment plan for 3 – 5 years while in a Chapter 13.  During that time, the debtor continues to pay his regular monthly mortgage payment for the first mortgage.  If the debtor was behind on the mortgage at the time the petition was filed, a portion of his or her plan payment goes towards catching up the mortgage.  This is what makes it possible for you to ‘save your home’ with bankruptcy – you get the chance to catch up your mortgage over a 5 year period while in Chapter 13.  The trick is, your plan payment must be high enough to actually pay off the full arrearage, and all other items that must get paid through the plan (car loans, tax debts etc.).

The ability to save your home is only one of the neat things you can accomplish with a Chapter 13. The second neatest thing, in my opinion, is the fact that the Chapter 13 process allows you to strip your second mortgage from the house.  If you remember from my previous post on 2nd mortgages and Chapter 7 – a mortgage is really a two-part instrument.  The mortgage is both secured by your house (and the bank can proceed against the house by way of a sale) and it is a personal liability (meaning the bank can pursue you personally by way of a lawsuit). 

If your house is worth LESS than what you owe on the FIRST mortgage, the bankruptcy code allows you to strip the lien from the house…. in effect, once all is said and done, the bank can no longer ‘proceed against the house’ because they no longer has a security interest in it.  The personal liability on the second mortgage becomes a regular unsecured debt – like a credit card, for example, and whatever does not get paid through the plan (and trust me, usually the unsecured creditors don’t end up getting much), is discharged at the end of the plan.

To illustrate, if you have a 200K first with a 10K arrearage on the date of filing, and a 150K second, but your house is only worth 150K, then the Chapter 13 allows you to bring your first mortgage current, and remove the second lien altogether.  The greatest challenge for most people is that you must complete the plan, in order for the order removing the second mortgage from your house to take effect. 

In the grand scheme of things, however, living on a budget and making regular monthly payments to the trustee based to repay some of your debts, is not a bad tradeoff for saving your home and ridding yourself of the second mortgage. For a free consultation about this issue with an Arizona attorney, call us today at 480-275-4894.   Want to find out more about us before making the call – pay us a visit at www.marcowimmerlaw.com. We look forward to hearing from you!

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