Since Halloween is just around the corner, I thought this might be a good time for me write about a possible Chapter 13 horror story.
Chapter 13 plans typically run for about three to five years. During this time, it is possible that you or your spouse may lose their job. In almost every Chapter 13 case, there will be an employment deduction order whereby the monthly Chapter 13 payment will be deducted directly from your paycheck. During a Chapter 13 plan, you are required to pay all of your future mortgage payments directly to your mortgage company.
This is how the nightmare starts
The possible horror story is this: your spouse loses her job and now you can no longer afford to pay your future mortgage payments. Since the Chapter 13 payments are coming directly out of your paycheck, you remain current on your Chapter 13 payments but with each month that passes, you fall further and further behind on your mortgage payments.
Eventually, the mortgage company will file a Motion for Relief from the Automatic Stay so that they can obtain permission from the Bankruptcy Court to foreclose on your house. Once the foreclosure process starts, you really don’t have many options. Section 109(g)(2) of the Bankruptcy Code prevents debtors from voluntarily dismissing a bankruptcy case and immediately refiling to stop a foreclosure of a home. Any debtor who voluntarily dismisses a Chapter 13 while a Motion of Relief is pending must wait 180 days to refile. What a nightmare!
In contrast, if the Chapter 13 trustee dismisses your case, you can refile and immediately regain protection for your home. How can you get the Trustee to dismiss your case if you are behind on your house payments? The answer is that you can’t. Do you remember the part of the story where I said that the Chapter 13 payments were coming directly out of your paycheck? The Trustee is never going to dismiss a case where the plan payments are 100 percent current.
what can you do to avoid this horror story?
How can a person avoid this type of horror story? The answer is that you need to stay in contact with your bankruptcy attorney throughout your case. Anytime you have a change in circumstances, you need to meet with your bankruptcy attorney. If possible, a motion to suspend your Chapter 13 plan payment needs to be filed just as soon as your spouse loses her job. Once the order is granted, your bankruptcy attorney can then have the employment deduction order stopped. Hopefully, this will enable you to make your house payments. Suspension periods typically only last for about three months. In a perfect world, your spouse will find another job. Your case will reach discharge and we will all live happily ever after.
The cold hard reality of life is that some people do in fact lose their homes to foreclosure in active Chapter 13 cases when the future mortgage payments are not made. I hate it when this happens.
The best way to avoid the nightmare is to stay in contact with your bankruptcy attorney so that you can be positioned in a place where you have the best chance of making those future house payments so that you can keep your home.
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