Mortgage not included in Chapter 13 - what happens if I default on mortgage payments?

[homer7]

My husband and I filed Chapter 13 in April '08 and our plan was confirmed a few months later. At the time we chose not to include our home within the plan and also chose not to walk away from it completely which I believe was an option at the time. We currently pay our mortgage (through Bank of America) outside the bankruptcy and up to this point have not been late on payments though we are barely scraping by as it is.

Being that we are in the middle of Chapter 13 what would happen if we stopped paying our mortgage payments? Would the loan go into default and eventually if we didn't pay would it go into foreclosure? Quite honestly at this point we would both be okay with losing the home and realize our credit can't take much more of a hit if we foreclose so that's not a major concern.

[momofthree]

One thing to consider...without the house, they may make you increase your plan payment depending on how high above IRS standards your mortgage payment is.

[justbroke]

First, no matter what... you mortgage is part of your plan of reorganization, it's just "paid" outside the plan. This is an important distinction. Your plan probably references the mortgage and states that it is paid outside the plan.

Being that we are in the middle of Chapter 13 what would happen if we stopped paying our mortgage payments? Would the loan go into default and eventually if we didn't pay would it go into foreclosure?

If you stopped paying, the creditor could complain to the Trustee to force you to pay it "inside" the plan. More than likely, they'll file for a motion for relief from the automatic stay and then proceed with foreclosure. Many creditors just foreclose and then file an unsecured claim for the deficiency.

Be careful, because strategically, your allowed expenses will be reduced to only the amount for rent expenses (for your specific county) should you choose to let the home go. This could significantly raise your Chapter 13 plan payment and/or put you in a 100% plan.

[Billssuck]

We just modified our chapter 13 plan to surrender our home (the first step) and recalculated our expenses with rent vs mortgage. For us, our plan payment didn't change because we are surrendering the house due to lower income now than when we filed. Next step, I believe, is that the bank (also Bank of America) will petition the court to lift the automatic stay so that they are able to communicate with us and to proceed with foreclosure. Since my modification was just approved today, I am proceeding with increasing my tax withholdings so that I don't owe as much on taxes for this year with not having the mortgage interest deduction.

We too have paid our mortgage outside the plan and are just now about 30 days late on the mortgage. Before we stopped it's payment, I contacted my attorney and he gave us the advice to modify our ch13. Perhaps you should contact your attorney as well.

Wish me luck with the foreclosure thing; it's uncharted territory for me and little scarey but I know once we get through it and our ch13 is finished in about 2 years, our financial future will be much brighter.

[LadyInTheRed]

Quite honestly at this point we would both be okay with losing the home and realize our credit can't take much more of a hit if we foreclose so that's not a major concern.

Actually, if you didn't reaffirm the mortgage, I don't think the foreclosure will do any additional harm to your credit score. I'm not 100% certain and hope somebody will correct me if I'm wrong.

[justbroke]

Actually, if you didn't reaffirm the mortgage, I don't think the foreclosure will do any additional harm to your credit score. I'm not 100% certain and hope somebody will correct me if I'm wrong.

There's no technical equivalent of a reaffirmation in a Chapter 13. You either include it in your Chapter 13 Plan of Reorganization or you surrender the property.

But you are correct... it won't hurt your score since it will be IIB (Included in Bankruptcy) or marked as Wage Earner Plan. Should be IIB if surrendered.

[Billssuck]

That is good to know about the credit score; I just thought it would be another hit on it since it is a foreclosure but since it's part of the bankruptcy, I understand why it wouldn't.

[justbroke]

That is good to know about the credit score; I just thought it would be another hit on it since it is a foreclosure but since it's part of the bankruptcy, I understand why it wouldn't.

They may report it incorrectly at first, but you should be able to dispute it and make sure it's IIB.

[Flamingo]

There's no technical equivalent of a reaffirmation in a Chapter 13. You either include it in your Chapter 13 Plan of Reorganization or you surrender the property.

But you are correct... it won't hurt your score since it will be IIB (Included in Bankruptcy) or marked as Wage Earner Plan. Should be IIB if surrendered.

If they were paying the mortgage as part of their plan (we also paid outside our plan), and there is no technical equivalent of a reaffirmation in a Chapter 13, then if they start forclosure proceedings and the plan is modified, the mortgagor can and may list the house as a foreclosure since it would no longer be a part of the Chapter 13. So the debtors may well have a Chapter 13 on their reports and then a foreclosure listed. May be difficult or impossible for them to have changed to a IIB.

[justbroke]

If they were paying the mortgage as part of their plan (we also paid outside our plan), and there is no technical equivalent of a reaffirmation in a Chapter 13, then if they start forclosure proceedings and the plan is modified, the mortgagor can and may list the house as a foreclosure since it would no longer be a part of the Chapter 13. So the debtors may well have a Chapter 13 on their reports and then a foreclosure listed. May be difficult or impossible for them to have changed to a IIB.

You're right. I don't disagree that it could occur the way you posted it.

I have had this happen in my Chapter 13. I initially had one of my investment properties "in the plan". About 5 months in, I changed my mind and changed my plan to surrender that property (and keep a different one). The lender foreclosed, and the account is IIB on all three credit bureaus.

I think what makes it "covered" or IIB, is that a Chapter 13 is a long-running pending bankruptcy and remains pending until it is dismissed or closed. As such, you can technically add things to it upon motion and hearing by the court. This is accomplished through a plan modification.

The key is... if the mortgage is discharged in the Chapter 13, it should not be listed as a foreclosure.

[AlbanyMan]

My husband and I filed Chapter 13 in April '08 and our plan was confirmed a few months later. At the time we chose not to include our home within the plan and also chose not to walk away from it completely which I believe was an option at the time. We currently pay our mortgage (through Bank of America) outside the bankruptcy and up to this point have not been late on payments though we are barely scraping by as it is.

Being that we are in the middle of Chapter 13 what would happen if we stopped paying our mortgage payments? Would the loan go into default and eventually if we didn't pay would it go into foreclosure? Quite honestly at this point we would both be okay with losing the home and realize our credit can't take much more of a hit if we foreclose so that's not a major concern.

There are a couple things:

First with the amount of debt folks have these days, the amounts included within bankruptcy is getting higher nd higher. You need to make sure that your house will not put you over the unsecured debt limit for Chapter 13, which I think is 330600. You may want to then just dump the house and convert to Chapter 7 if you are now a below median debtor. There may be other reasons why 13 is best for you, I dont know, but these are considerations. Also can you sell the house and make any money or even consider a short sale if your in danger of going over the chapter 13 limit.

And are you sure your situation wont change for the better in a couple months and will be better able to swing the payments. Maybe even include the arrears in a modified plan over the balance of your plan upto a total of 60 months (if you can afford too) and get current on the mortgage. Its getting really hard these days for folks like us to get into our own homes with all the defaults and rule changes. Maybe even rent it for a year or so while you regroup or rent the garage to raise the extra money before you let it go. Just my thought. Good Luck.