In 2005, when Congress made sweeping changes to the Bankruptcy Code, they left virtually unscathed the Chapter 13 Bankruptcy provisions designed to save a home from foreclosure. Today, with foreclosures again making front page news, many families are unaware that Chapter 13 Bankruptcy may still be used to prevent foreclosure.
Chapter 13 Bankruptcy allows homeowners who are delinquent on their mortgage payments to stop foreclosure proceedings and propose a Plan that cures the delinquency with payments stretched over as many sixty months (the Plan Period). So long as the Debtor makes the regular monthly mortgage payments to the lender and the Plan payments, the lender cannot proceed with foreclosure. At the end of the Plan Period when the delinquency has been cured, the Chapter 13 is closed and the threat of foreclosure has been resolved.
Additionally, the filing of a Chapter 13 Bankruptcy allows a homeowner to strip from his/her home a Deed of Trust that reaches no equity. In other words, if the first position Deed of Trust exceeds the value of the home, any junior lien (second position Deed of Trust, home equity line of credit, etc.) reaches no value in the property and is therefore wholly unsecured. This stripped lien is treated as an unsecured debt by the Plan (typically receiving pennies on the dollar) and is discharged at the end of the Plan Period. This has the effect of reducing the debt on the home.
It is true that Chapter 13 Bankruptcy has rather strict qualifications, including limitations on the total amount of debt. It requires a competent bankruptcy lawyer to analyze the specific debt and income facts for each case, to determine if the homeowner qualifies. If a homeowner can satisfy these qualifications, Chapter 13 provides a mechanism for stopping foreclosures and reducing the debt on homes. Additionally, the Central District of California, Bankruptcy Court has capped the fees that an attorney may charge for a typical Chapter 13 Bankruptcy, so it is quite reasonable.