One way to save your house from foreclosure

I talk a lot about Chapter 13 bankruptcy in this blog, so much so that some might think I prefer them. The truth is, I file more Chapter 7 bankruptcies thanChapter 13s but the latter require a bit more explanation. Chapter 13s are more flexible in many ways than a Chapter 7. One of the primary benefits of the Chapter 13 is the ability to propose a plan that saves one’s house from foreclosure.

You see, pursuant to 11 U.S.C. Section 1322, a debtor can propose a plan that allows for the cure of a default on a secured loan. That is the fancy way of saying that if you have missed payments on your home loan (defaulted) then the plan can fix it.

This is especially good for folks who took out one of those “balloon” payment loans as a home equity line of credit. These loans had a lot to do with the economic downturn of recent years because most of them were interest only payments and then the principal would come due after 10 or 15 years. The loans were undersecured in that the houses were not worth as much as the amount loaned and people who could afford the interest only part could not afford to pay principal. This left them facing foreclosure.

So, in a Chapter 13 you can propose a plan to stretches that principal payment out for an additional five years. This is no miracle ‘cure’ of the debt. The creditor may oppose the plan, though that it unlikely if they believe they can be made whole rather than getting only a portion repaid through a master commissioner’s auction. Also, you still have to show that you have sufficient income to pay the entire loan during that time, but for many, it may give just the breathing room they needed to save their home from foreclosure.