Chapter 13 bankruptcy is designed for individuals who’ve defaulted on their home mortgage. It provides a powerful tool for catching-up past-due payments on standard, 30 year mortgages. Homeowners may take 3 – 5 years to repay the past-due installments. Upon completing the case, the homeowner emerges from Chapter 13 current on their mortgage.
What if the loan is not a standard 30 year mortgage, but instead has already matured or is about to mature and there is a significant balance? I’ve come across this situation in multiple cases recently. For example, a Bank may provide a short term home construction loan (2 – 5 years), but upon expiration of the original term it may refuse to convert the loan to a permanent loan. The borrower is stuck with a huge balance and may be unable to refinance with another bank.
Chapter 13 may work if the borrower can repay the entire balance, plus interest, in equal installments over 5 years. However, this is too expensive for many Chapter 13 candidates. Consider a relatively modest loan of $250,000. Amortized over 5 years at 6%, the monthly installment (excluding taxes and insurance) amounts to about $4,833. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 30 percent of your gross monthly income. Assuming a modest escrow of $167 per month (total payment $5,000), the debtors’ income would need to be about $200,000 per year, and this presumes the debtors have little if any other debt.
Homeowners have another option. Unlike a Chapter 13 bankruptcy, in Chapter 11 bankruptcy (1) the loan term is not limited to 5 years and (2) payments do not have to be made in equal installments. The process is more flexible. Of course there’s a trade-off. Chapter 11 is more complicated than Chapter 13 and, consequently, more expensive. Further, unlike in Chapter 13, creditors in Chapter 11 have the right to vote on the debtor’s plan and at least one class of creditors must accept the plan. Nevertheless, in situations involving a matured loan, it’s worth investigating whether the more flexible Chapter 11 process may help.
In sum, if your home mortgage has expired or matured, the first option is usually to try to refinance the loan outside of bankruptcy. If that doesn’t work, Chapter 11 may enable you to compel the lender to accept a loan that extends beyond 5 years and/or that includes irregular payments or a balloon payment.
