Chapter 13 Bankruptcy: Key Considerations for Real Estate

What happens when a mortgage loan matures during an open bankruptcy case?

It’s a common question among creditors, especially during these times of economic uncertainty and inflation. Understanding the ins and outs of this complex filing can help you recover unpaid debts related to real estate and ensure as smooth of a process as possible. Recently, shareholder Milos Gvozdenovic and attorneys Garry Masterson and Erin McCabe answered some of the industry’s top questions on chapter 13 bankruptcies in the latest Weltman webinar, Real Estate in Chapter 13 Bankruptcy Cases: Life After Confirmation.

The engaging session reviewed several key topics, including:

• Treatment of mortgages within a chapter 13 
• Notice of mortgage payment change
• Response to notice of final cure

Chapter 13 bankruptcy FAQs

Here are a few of the top FAQs answered by our chapter 13 bankruptcy experts.

1. How does a chapter 13 filing affect creditors?
At the outset, a chapter 13 bankruptcy filing operates as a stay on any foreclosure case or sheriff’s sale. As soon as the bankruptcy is filed, creditors must halt any collections actions. The case cannot be prosecuted or pursued without you filing and obtaining a relief from stay from the bankruptcy court. 

In foreclosure-related cases, if a judgment has been entered and there is a sheriff’s sale that is scheduled in the future, it needs to be canceled or postponed if relief from stay is not obtained before the sale proceeds. Once you obtain relief from stay, the sale can proceed as normal under the law of the state. 

2. Is relief from stay always granted?
You cannot always assume that relief from stay will be granted related to the mortgage. That’s why it’s important to affirmatively participate in all aspects of the bankruptcy case, even while the relief from stay is pending a court judgment. You can file a proof of claim, review the bankruptcy plan and, when the plan is filed, you can object to the plan, if necessary, and monitor case events. 

3. How does a chapter 13 filing impact pre-petition mortgage arrears?
Sometimes, when the debtor is behind on mortgage payments and files for bankruptcy, the court will put those arrears related to your account into the plan. When this occurs, the arrears are intended to be paid over the lifetime of the bankruptcy plan, which is usually a term of three to five years. 

In many instances, you will receive more than one type of payment per month. You may receive payments from multiple different sources, such as a trustee for the pre-petition arrears or post-petition payments from the debtor. You need to make sure you apply these payments to the correct payment. 

4. Are there exceptions to the anti-modification rule?
Generally, a court cannot approve a chapter 13 plan that modifies the terms of the mortgage if the principal residence of the debtor secures your loan. They cannot cram down the principal balance due on your loan, nor can they lower the interest rate or the monthly payments. They also cannot extend the term on the loan or increase the number of payments.

However, there are exceptions. A major exception is that debtors can cure the pre-petition arrears while maintaining the post-petition arrears. The only requirement for what we call “cure and maintain” is that debtors must be able to maintain plan payments plus cover other expenses, including car, food, electric, and other bills. 

Another exception is related to early-maturing loans, which is any loan that matures before the final payment is due under the chapter 13 plan. In this situation, the normal restrictions regarding anti-modification are removed.  A plan could be approved to lower the interest rate or principal balance paid, or it can increase the number of payments while the bank’s case is pending.

5. If the bankruptcy plan fails and the foreclosure resumes, does a creditor have to start from scratch?
Of course, if this happens, you will want to connect with your attorney who is handling the foreclosure. However, typically you do not start from scratch. You would pick up where you left off. If the chapter 13 plan gets dismissed, you can resume the foreclosure and proceed with the sale of the property. 

6. What happens if a property sale goes forward before a bankruptcy is filed?
If the property sold at auction but the sheriff never confirmed the sale, or the deed was never transferred to the purchaser, you would normally file a motion for relief or object to the plan and attach the sale order as an exhibit. The prevalent case law indicates that once the property is sold before the bankruptcy is filed, the bankruptcy plan cannot undo the sale. It can only stop the foreclosure where it’s at but not go back and unwind what’s already been done.

For more FAQs, make sure to watch the webinar here. As always, contact our bankruptcy recovery team if you have additional questions or concerns. 

These blogs are not a solicitation for business and it are not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.