Missed Mortgage Payments? What’s Next?

petition for bankruptcy

If you fell behind on mortgage payments, chapter 13 bankruptcy may help. Chapter 13 bankruptcy was designed to help homeowners catch up on payments and potentially keep their homes.

Immediately upon filing bankruptcy, a protection referred to as the Automatic Stay takes effect, shielding debtors (this is how the court refers to people who file) from collection efforts of creditors. It freezes any debt-related lawsuits against you, including foreclosure cases, and cancels any upcoming foreclosure sales. This allows debtors to try to pay some or all of their debt and get out of the proverbial black hole while not worrying about creditors garnishing their checks or taking their home in the interim.

Mortgage Modification

One of the options within Chapter 13 bankruptcy for saving one’s home is the MMM (Mortgage Modification Mediation) program (at least in Florida and some other states as well). A neutral third party is selected to facilitate communications between homeowners and lenders. When participating in the MMM program, certain rules need to be followed, which is good for borrowers. All participants must use an approved secure online portal for the submission of documents and communication. The portal stores the documents submitted and received and tracks the date and time of submission. Upon submission of the documents, the borrower is entitled to two, one-hour mediation sessions, which allow the parties to discuss various programs the borrower will be considered for and if the borrower does not qualify, explain the reason for the request being denied. There are no guarantees that a borrower will be approved for a loan modification under MMM, but, as opposed to attempting to do it on your own, it is a program which guarantees that the modification request will be reviewed by the lender.

While the debtor is being reviewed for a modification within the MMM program (typically a few months), the amount the debtor needs to pay through the bankruptcy payment plan to the lender is what is referred to as an “adequate protection” or good faith payment, which is generally 31% of the debtor’s gross monthly income. This amount would need to be reasonable, though. If it does not even cover escrow, the lender will likely object.

What happens if the lender denies the modification application?

First, we review the reasons given for the denial and confirm what information the lender used in its analysis. If there is a discrepancy, an appeal may be submitted. If the denial is valid, the Court’s MMM program requires debtors to take one of the following actions within fourteen days of a modification denial:

  • The debtor may switch to a “cure and maintain” bankruptcy plan to catch up on the missed mortgage payments and make the ongoing ones, if the debtor’s income is sufficient to make a cure and maintain plan feasible. (Cure and maintain may also be Plan A for many filers who do not wish to apply, or are not good candidates, for a modification.) OR
  • If the modification is denied and the amount needed to catch up on missed mortgage payments is impossibly high even when spreading it out over 5 years in a chapter 13 bankruptcy plan, the debtor may choose to “surrender” his or her interest. This option allows the debtor to eliminate or discharge the mortgage debt, so that if the debtor is unable to save the property, the debtor will not be personally liable for any deficiency (the lender would not be able to collect money from you personally). However, the lender would be able to continue with the foreclosure proceeding and repossess the property. Foreclosure courts generally would not let the debtor/borrower/defendant defend the foreclosure case if they surrendered the property in the bankruptcy case. OR
  • If you do not want to surrender the property just yet, because you would like to explore other options first, such as refinancing, you may treat the lender “direct and outside.” The problem with this option is that if you are unable to save the property, you are stuck with the deficiency unless you negotiate a deficiency waiver with the lender. If a property is sold in a foreclosure auction for less than the balance of the mortgage, the bank can sue you for the difference (this is a deficiency). If you surrender the property in the bankruptcy, you eliminate this debt; however, if the mortgage is treated direct and outside the bankruptcy, the bank can sue you for the difference.

Ideally, the debtor in this situation would either be approved for a modification or be able to cure and maintain. Chapter 13 bankruptcy is essentially a reorganization of debts lasting typically 3 or 5 years, in which debtors make monthly payments to the bankruptcy trustee, which the trustee then disburses to creditors according to the payment plan debtors propose. For purposes of keeping one’s home when behind on payments (absent a modification), these monthly payments serve as a payment plan to catch up on the missed mortgage payments over the life of the bankruptcy and the regular mortgage payment going forward. By the end of the bankruptcy case, upon completion of the payments, borrowers will be caught up on the mortgage and will have avoided foreclosure.

Eliminating Second Mortgages

In addition to these two common options, if a homeowner in bankruptcy has more than one mortgage against the home, chapter 13 bankruptcy may also potentially eliminate the second mortgage. If the first mortgage balance is higher than the value of the home, the second mortgage may potentially be “stripped” (eliminated altogether and discharged). If granted, once the bankruptcy is completed and a discharge is issued, the second mortgage would be satisfied.

If it is an investment property instead of the debtor’s homestead, the first mortgage can be “crammed down” to the value of the home. This means that if the value of the home is less than the mortgage balance, the mortgage balance may be reduced to the value of the home. In this situation, when the five-year bankruptcy payment plan is completed, the mortgage is paid in full.

Contact Our Fort Lauderdale Bankruptcy Attorneys

There are various options available and every case is different. It is important that you call an experienced bankruptcy attorney in your area to see if you qualify for Chapter 13 bankruptcy, if bankruptcy is the best option for you, and to help you take advantage of all the relief that may be available to you. Our Fort Lauderdale bankruptcy attorneys are here to provide you with more information.

Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation to see how we may be able to help you.