Bankruptcy

Prepare to Pay Extra if You Fall Behind on Mortgage Payments While in Chapter 13

By Jonathan Ginsberg, Atlanta Bankruptcy Attorney

In the Northern District of Georgia, where I practice, Chapter 13 debtors pay their mortgage payments directly to the mortgage lenders, rather than sending their mortgage payments to the Chapter 13 trustee for subsequent disbursement to the mortgage lender.

What happens when a Chapter 13 debtor falls behind “post petition” – after his plan has been filed and confirmed?

When a post-petition mortgage delinquency occurs, the lender’s recourse is to file a motion for relief from stay, which is a request that the judge lift bankruptcy protection to allow the lender to initiate foreclosure proceedings.  In my experience, lenders will first have their lawyers send the debtor’s attorney a letter, with the motion coming after the debtor has fallen behind by two or three months.

The filing fee for a motion for relief is $150, and of course the lender’s attorneys will also charge a fee.

When I receive a motion for relief, I will contact my client to find out what happened and to see if he wants me to try to work out a settlement.  Generally mortgage companies are amenable to settling motions for relief because they know that most bankruptcy judges will not grant their motion if there is any reasonable chance that the debtor can catch up his mortgage payments.  Judges generally want Chapter 13 debtors to keep their homes and in my district the judges expect that the debtor’s lawyer and the lenders lawyer will try to work out a deal.

The settlement of a motion for relief takes the form of a Consent Order that denies the motion but obligates the debtor to pay back the missed payments over a 6 to 8 month period.  In addition, judges will allow the lender to tack on the $150 filing fee and between $400 and $600 in attorney’s fees for having brought the motion for relief.

My clients are sometimes upset to learn that not only are they going to have to catch up on two or three missed payments over the next 6 months, but that they are also going to have to pay an extra $750 to the lender for attorney’s fees and costs, even when the case is settled prior to a hearing.

Unfortunately, you will incur these extra costs if you do not cure the post petition default prior to the time a motion for relief is filed.  While you have the right to challenge the attorney’s fees in court before the judge, you run the risk that the judge might order a less generous settlement or that the judge might grant the motion and all the foreclosure process to start.

Obviously the best solution is not to fall behind at all, but if you do, call your lawyer as soon as you realize that you will become delinquent post petition.  It is in your best interest to avoid motions for relief and the associated costs that you will ultimately pay.

Full post as published by Bankruptcy Law Network on February 15, 2010 (boomark / email).