What Happens if You Get Behind on Mortgage Payments During a Chapter 13?
Falling behind on mortgage payments can trigger foreclosure proceedings even when consumers are under the protection of a Chapter 13 repayment plan. In some cases, missed payments can cause a bankruptcy case to be dismissed. For most consumers, however, options are available to prevent foreclosure during Chapter 13.
Why Could the Bankruptcy Be Dismissed?
When filing for Chapter 13 bankruptcy, the debtor agrees to remain current on the mortgage throughout the duration of the repayment plan. The Court requires proof that the debtor has regular income and can afford the monthly payments.
A lot can happen over the three to five years repayment period, however. Job loss, a serious injury or illness, or another financial setback can cause debtors to fall behind on monthly payments. One missed payment might not cause an immediate issue. But circumstances can quickly go downhill once two or three mortgage payments are missed. How late payments are handled often depends on the type of Chapter 13 plan in place.
Chapter 13 Traditional Plan
With a traditional plan, the mortgage payment is not included in the repayment plan. The debtor pays the lender separate from the payment to their bankruptcy trustee. If a payment is missed, the protections afforded by the automatic stay put in place when the bankruptcy was filed could end.
Chapter 13 Conduit Plan
In a conduit plan, which is common when mortgage payments are behind at the time of filing, the Court requires the debtor to include the monthly mortgage payment as part of the payment made to their Chapter 13 trustee. The trustee then makes the payment to the lender. If the debtor misses a payment, the trustee may notify him that the bankruptcy may be automatically dismissed if payment is not by a certain date. If the payment remains delinquent, the trustee could file a motion with the Court to dismiss the case.
Possible Options to Negotiate with Lender/Trustee
When debtors fall behind on mortgage payments, they must be proactive in remedying the situation. The lender or Chapter 13 trustee will often make arrangements for the debtor to resume current payments and catch up on arrears over three to six months or they might add the arrears into a restructured repayment plan. These agreements typically have a “drop dead” clause that stipulates that future missed payments will trigger a lift of the automatic stay or bankruptcy dismissal without a court order.