Helping Homeowners in Chapter 13 Bankruptcy Prevent Foreclosure

February 22nd, 2024

Consumer bankruptcy filings in the U.S. rose 16 percent to 434,064 in the year ending December 2023, compared with 374,240 in December 2022. Both Chapter 7 and Chapter 13 bankruptcies saw increases. This is the fourth straight quarter of rises in bankruptcy filings, following a decline of over a decade. Homeowners may consider bankruptcy when they’re facing foreclosure. But there may be different outcomes depending on which they file they should discuss with an attorney before they do.

Chapter 7 bankruptcy is a liquidation proceeding in which a Chapter 7 trustee is appointed and liquidates a debtor’s non-exempt assets that may include a sale or surrender of real estate and other property. Most debtors who file Chapter 7 bankruptcy receive a discharge of unsecured debt, like credit card debt.

It’s important to note, however, that a Chapter 7 bankruptcy may not protect a homeowner from a foreclosure. For example, if a homeowner is substantially behind on their mortgage and their lender is unwilling to modify their loan, the lender may petition the bankruptcy court to proceed with foreclosure proceedings.

Chapter 13 bankruptcy is a reorganization of debt and allows debtors to establish a court approved repayment plan and restructure their debts and potentially save their homes or vehicles. For homeowners seeking to prevent foreclosure, a Chapter 13 debt repayment plan is an option worth exploring with a lawyer.

The rise in bankruptcies reflects economic stress among Americans, which disproportionately affects the low-income communities BlueHub SUN primarily serves. These residents experience inflation, higher interest rates and student loan payments resuming more intensely. These stressors may mean higher home foreclosure rates in vulnerable communities, leading more homeowners under economic duress to pursue bankruptcy when their debt overwhelms them.

“Debtors are hardworking people like you and me,” says Margaret A. Burks, Esq., Chapter 13 Trustee, Office of the Trustee—Cincinnati.

Those who don’t meet the requirements for filing Chapter 7 may find themselves in Chapter 13, which may allow them to keep their homes. It’s essential for foreclosure non-lawyer prevention specialists to collaborate with a homeowner’s bankruptcy attorney to help their clients in bankruptcy succeed in saving their homes, which can be more complicated in a Chapter 13 bankruptcy.

Understanding the Link between Chapter 7 Income Limits and Chapter 13 Eligibility

The Bankruptcy Code requires that individuals seek credit counseling before they file for bankruptcy under either Chapter 7 or 13. But, homeowners still may end up in bankruptcy and bankruptcy process is complex, regardless of which bankruptcy chapter a homeowner files under.

So, while consumers can file for bankruptcy on their own, for the best results, filing for bankruptcy should start with a homeowner working with a qualified consumer bankruptcy attorney in their state. Since they must get credit counseling before filing for bankruptcy, they should work with a credit counselor recommended by the federal government.

“Consumers need an attorney who’s committed to bankruptcy work and likes what they do,” says Paul Young, a Pennsylvania and New Jersey bankruptcy attorney at Young, Marr, Mallis & Associates, with over 30 years of experience. “Their attorney needs to be empathetic, care why the client is in their financial position, and be committed to helping them resolve their issues,” Young emphasized.

A qualified attorney in their state can help clients determine where they fall within the means testing income requirements for filing Chapter 7. Means testing, which compares a debtor's income to the median income for their state, as identified in census data, determines bankruptcy eligibility. These guidelines are updated annually based on the latest census data.

They affect Chapter 13 filings because if a debtor is at or above the income limits for their family size for filing Chapter 7 in their state, they will not qualify for Chapter 7 and must file under Chapter 13. Having higher income presumes debtors have the means to pursue a Chapter 13 repayment plan.

But those with higher value assets—like significant equity in their homes—may still lack the necessary disposable income to make payments under a plan, making a Chapter 13 plan not feasible. That, again, is where attorney guidance becomes important. “I see situations like this often,” says Young. People call him believing their higher assets will allow them to file Chapter 13 only to learn that might not be possible.

“The best repayment plans I see are from a good attorney and a debtor who’s committed to meeting the requirements of their Chapter 13 bankruptcy,” says Burks. “Those plans also have a good budget that truly identifies what the debtor’s real income and expenses are.” Those are the plans most likely to help the debtor succeed with their financial reorganization and save their home.

Here are the means testing income guidelines for filing Chapter 7 bankruptcy as of November 1, 2023, in 11 states where BlueHub SUN operates.

the means testing income guidelines for filing Chapter 7 bankruptcy

*Add $9,900 for each individual in excess of 4. (Source: Department of Justice)

A local attorney who specializes in consumer bankruptcy is best at advising homeowners whether they qualify to file under either Chapter 7 or 13 based their income, debt, and assets. If they hire one, homeowners must work with their attorney to prove to the bankruptcy court they have sufficient income to make payments under a Chapter 13 plan.

If they can’t prove they have the income to support Chapter 13 plan payments, they may be forced to file Chapter 7. That usually means liquidating their assets (though some are exempt from that process) and facing the risk of home foreclosure and vehicle repossession.   

In either a Chapter 7 or 13 proceeding, most individual debtors will receive a discharge of consumer debt. In some Chapter 7 cases, however, debtors with substantial non-exempt assets or equity in their homes may be required to sell their property.

In a Chapter 13 proceeding, debtors may be allowed to keep those assets if they are able fund a Chapter 13 plan. While consumer bankruptcy law is meant to provide individuals with a fresh start, it also provides protections to creditors. It is structured to make sure creditors are treated fairly. Given the complexity of consumer bankruptcy law, an individual consumer should consult with a knowledgeable bankruptcy attorney to evaluate which bankruptcy chapter they qualify for and which presents the best option to preserve their assets.

Once a homeowner files bankruptcy under either chapter, they receive protection from collection efforts by creditors commonly referred to as the “Automatic Stay.” The Bankruptcy Code prevents creditors from foreclosing or making other collections efforts once an individual files for bankruptcy under either chapter. They must get permission to proceed with those collection efforts from the bankruptcy court.

After a homeowner files a bankruptcy petition, either a Chapter 7 or Chapter 13 Trustee is appointed. The Chapter 7 Trustee will liquidate any non-exempt assets of the debtor. Typically, in a Chapter 13, the trustee will administer the plan of reorganization, collect payments from the debtor and make those payments to creditors. 

Once they’re in a Chapter 13 repayment plan, which typically lasts between 3 to 5 years, a homeowner needs the sufficient income and support to complete the plan successfully and prevent foreclosure.

How Professional Collaborations Help Homeowners in Chapter 13 Succeed

While it’s the most important aspect of repayment under Chapter 13, making payments to the trustee’s office is only part of satisfying requirements during the process. When a homeowner enters Chapter 13 bankruptcy, they and other non-lawyer housing professionals they work with like real estate agents, loan officers, or housing counselors, should collaborate with a homeowner’s attorney to meet those other obligations under their plan.

The attorney files the multiple initial forms required for a bankruptcy with the court. They help the homeowner collect and submit documents to the bankruptcy trustee’s office.

But there are ongoing requirements for a homeowner throughout their bankruptcy plan. Those include document submission to the trustee and gathering paperwork for court proceedings. “Clients aren’t the greatest about getting us the paperwork we need,” says Young. So, homeowners it’s essential homeowners are educated about and helped with that process. That way, they meet all their obligations under the Bankruptcy Code and avoid potential problems with their bankruptcy case.

“For example, a real estate agent who sells a home for clients in Chapter 13 should encourage that homeowner to inform their bankruptcy attorney immediately,” says Young. Once a person files for Chapter 13, the Bankruptcy Code requires a debtor receive permission from the court before selling an asset and modifying their plan.

Before a home sale, the debtor’s attorney must file a motion with the bankruptcy court allowing the sale of the property. After a home sale, the bankruptcy attorney must file a motion with the bankruptcy court to have the repayment plan modified to reflect the sale. If the motion is granted by the court, it goes to the trustee’s office, where the homeowner’s repayment plan gets modified.

If a homeowner in Chapter 13 sells their home without involving their bankruptcy attorney, they risk having to continue making payments under their repayment plan to the trustee’s office for a home that's already been sold. This situation can lead to complications, including the potential for unnecessary payments on the sold property.

Young believes a real estate agent working with a homeowner they know are in Chapter 13 should contact them before they sell the home, however. That way, they can work together on the process.

The same is true when either a housing counselor or mortgage loan originator helps a homeowner get a loan modification or refinancing, which Chapter 13 plans can allow them to do. “Any loan modification or refinance offer would need to be approved by the bankruptcy court before the homeowner agrees to the new terms,” says Tammy Stickley, Esq. who is also a staff attorney at the Office of the Trustee in Cincinnati.

Even if the homeowner got the loan modification or refinancing done on their own, which Young says often is the case with clients he represents, it’s essential they let their attorney know. The attorney is responsible for filing motions in bankruptcy court so they can get the modification approved and get their plan at the trustee’s office changed to reflect the new payments.

But a housing counselor should encourage the homeowners to inform their attorney of any changes in their situation. That includes income changes that might affect their ability to keep making payments under repayment plan.

Resources for Housing Counselors

Housing counselors can play a role in helping clients meet all the requirements of their repayment plant. Providing information on educational resources about Chapter 13 bankruptcy or how to find an attorney in their state are helpful steps. Nonprofit mortgage advisors, like BlueHub SUN, can provide the same support, while redirecting homeowners to their attorneys for legal advice.

Seek Advice from Qualified Professionals: You should not rely on BlueHub SUN for tax, legal, financial or accounting advice. While we will work with you to attempt to help you repurchase your home, we do not provide tax, legal, financial or accounting advice. Please consult with your own tax advisor, lawyer, financial advisor, accountant or other trusted professional on questions seeking tax, legal, financial or accounting advice. This blog post is for informational purposes only.

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