Does Chapter 13 Bankruptcy Stop Foreclosure?

Dallas—Fort Worth Bankruptcy Lawyer Explains

Video Transcript:

David Shuster: 

Bankruptcy alongside and even sometimes ahead of, the best option to stop a foreclosure sale.

Tom Mustin: 

Can bankruptcy save your home from foreclosure? We're gonna talk to Attorney David Shuster about that on today's episode of Ask the Lawyer. David, thanks for joining us.

David Shuster: 

Yeah, thanks. Glad to be here.

Tom Mustin: 

Good to see you. Now in Texas, if you're at risk of defaulting on your mortgage payments or you're already facing foreclosure, can bankruptcy save your home? And if so, how?

David Shuster: 

It certainly can, and bankruptcy is really just... Right along with paying off the total amount that you're behind, bankruptcy is the most sure fire way to save your home, and sometimes I have clients that have the sort of last minute ability to come up with the amount of money that they're in default, however, oftentimes because the foreclosure is looming, they don't just even have the time to pay the money to get current, so... Yeah, bankruptcy alongside and even sometimes ahead of the best option to stop a foreclosure sale by filing it, getting a case number, providing the automatic stay, and then work entering into a plan to repay the arrearages over an extended period of time.

Tom Mustin: 

How is Chapter 13 bankruptcy different from Chapter 7, which is one that folks are probably more familiar with?

David Shuster: 

Yeah, indeed, Chapter 7, you're looking to just clear off debt, it's a fresh start bankruptcy, it doesn't re-organize and try to pay creditors through a bankruptcy plan, that's what a Chapter 13 is, and so a Chapter 13 plan ranges in length. They're typically three to five years long, but we do have some clients that they can't quite meet the financial obligation of repaying those arrearages within the time frame of a Chapter 13 bankruptcy pay-out plan, and so therefore, they just need to buy time to be able to sell the house as well. So you can also do that. And so the Chapter 13 is different because we're looking to pay creditors, that's the short answer of that you can still wipe out debt in a Chapter 13, like you can in a Chapter 7, that is gonna a discharge of debt so you can accomplish in a Chapter 13, what you're accomplishing in a Chapter 7, but first, repaying the debt that you have to pay back and wanna pay back to save property.

Tom Mustin: 

Why do you have to file a Chapter 13 to save a home from foreclosure?

David Shuster: 

You have to do it because the creditor is unwilling to work with you, and so we have a lot of instances are coming up, especially after the pandemic relief and people falling behind, and a lot of people are saying, Oh, I was on a forbearance, meaning that the mortgage company was holding off on trying to collect payments while they're working something out, and a lot of those deals did get worked out and are getting worked out, but the short answer to why you would have to file Chapter 13 bankruptcy to say the home is simply because you fell behind and the mortgage company is not giving you any workable options, and so it's the strongest tool that you have in your tool chest to pull out to force the creditor to accept payments for the past due amounts over an extended period of time. Some people look at it as like it's sort of a forbearance, but within a bankruptcy, and so you have to use it to force a creditor to not go through with a foreclosure sale because they're not giving you any other options.

Tom Mustin: 

And how long does that Chapter 13 bankruptcy take, and what do you have to do to successfully complete the payment plan process?

David Shuster: 

Yeah, great question. So the first thing you do is, of course work with the attorney, pay the fee to get the case filed, then the next step is to resume and actually initiate payments with the trustee, they start 30 days after the date you filed your case, and so if you file your case today, September 28th, then on October 28th, you have your first bankruptcy plan payment due, and so you just have to keep current with those payments and work with the attorney to make sure all the information is filed, you attend a hearing, which is by video conference, they're doing Chapter 13 in this district, probably a lot of the other districts as well in Texas are doing these conferences, these hearings by Zoom, and so it takes a little out of your day, you don't have to drive downtown, and so it's a matter of filing doing the case number, starting to make the payment every 30 days to the trustee attending the one Zoom hearing, and then your attorney myself would be attached to this Chapter 13 as long as you're in the case, so the good news is you have an attorney the entire time who's gonna look out for you, the notices are gonna come to us, my staff is well trained. If you run into, we understand hiccups happen, you can't make one of your trustee payments, there's always options, it's not like a... You do have to make these payments to stay in your plan and keep the case alive, but you do have options to... If something changes during a Chapter 13, you talk to your attorney and you do have options to stay in the case and not fall out of that Chapter 13 case and again be facing foreclosure at a later date.

Tom Mustin: 

And I'm sure that's very comforting to a lot of folks, now, what about... Just get back to talking about homes, equity in your home, do you lose equity in your home when you file for bankruptcy in Texas? 

David Shuster: 

You do not. Your home equity is exempt. Okay, and so Chapter 7, we're talking about it under a little bit of a different structure, but essentially your home equity is protected, that's what you're looking to protect by filing the bankruptcy. If you don't file the bankruptcy, that's when you're at risk for losing your equity, 'cause a bank will sell your property, obviously in a foreclosure sale and you're gonna get back if you're lucky some of that equity, but it's not one... That's what clients are looking to do is protect their equity, even if they get to a point where they're not sure if they can make the mortgage payment plus the past due amount. 

And so, just to clarify, obviously, if you're not current on your home, whether it's been six months or a year or 18 months or however long... Once you file that Chapter 13 bankruptcy, you're repaying the pasts due amount, and then you're also starting to pay your regular mortgage payment again... Right, and so you're paying on time now, and then you're making this additional payment to cover the times that you didn't pay it, it's kind of like a refinancing, but under these very strict parameters of a Chapter 13 bankruptcy, and so that sometimes can prevent a financial strain to the client, and you can just call your attorney and give me a call and we can tell you how you hey, You wanna try to sell the house, you can convert to a Chapter 7 to wipe out your debt and then sell the house after that. 

Because once the foreclosure sale is off the table with the bankruptcy, you've achieved your first goal and then with your attorney, you can work with the Chapter 13 trustee and your attorney to find out if you need to have a three-year plan, four year, five-year plan, if you wanna convert to a Chapter 7, sell the home, it's basically hitting the stop button on anything the creditor's doing and resets everything to start again now making the payments to the trustee and the mortgage company through the trustee, and you have plenty of options if things may seem insurmountable with the amount of money that you owe the mortgage company, there are still options to sell or convert to a Chapter 7. And then in every case is different as far as what creditors will get paid back and what creditors won't get paid back, but in a Chapter 13, the primary goal of the attorney is within the confines of this system to pay back the creditors that you want to and need to pay back and not pay back or discharge a creditors that you're not legally obligated to pay back in the Chapter 13, and that discharge comes at the end of the bankruptcy once you finish it.

Tom Mustin: 

And David, one thing I wanna ask you is, Do you need an attorney to file for Chapter 13 bankruptcy because I imagine if you're in debt... Hiring an attorney's an expense you don't even wanna think about.

David Shuster: 

Yeah, you don't see too many... They call that pro se. That means representing yourself. You see that very rarely in Chapter 7, and when we're having the hearings, sometimes you hear the other... So you hear that and it presents an array of issues when someone's trying to represent themself, definitely not recommended. We didn't talk about fees here in this conversation, but the Chapter 13 offers a fixed fee scenario with fees that are strictly scrutinized by the court and trustee, they say how much attorneys can get paid, you will pay a small portion of that attorney fee down, let's say it's 20% of the total fee, then the fees are fixed, we're allowed to charge certain fees for certain things, and so when you make your plan payment to the trustee, the attorney is actually going to slowly get paid the remainder of his or her fee, and so going at it alone, it just doesn't make any sense for a Chapter 13.

Tom Mustin: 

Yeah, sounds like the payment plan is much more affordable

David Shuster: 

Yeah, there's no reason to do that.

Tom Mustin: 

Okay, well David, great insight as always, we appreciate you joining us today.

David Shuster: 

Yeah, thanks. Always glad to be here. Thank you.

Tom Mustin: 

And that's gonna do it for this episode of Ask the Lawyer. My guest has been David Shuster. If you wanna ask Dave a question about your situation, call the number on the screen. Thanks for watching. I'm Tom Mustin for Ask the Lawyers.

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