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CHAPTER 13 BANKRUPTCY CAN HELP DEBTORS SAVE THEIR HOMES
Chapter 13 Bankruptcy offers significant protection for Debtors who have fallen behind on their home mortgage payments. Under the Bankruptcy Code, Debtors are permitted to catch up on all delinquent payments on mortgages and home equity loans against their primary residence over a three to five year period under the terms of a Chapter 13 Plan. Provided the Debtors remain current on all payments against their home following the commencement of the Chapter 13 case, and make all Chapter 13 plan payments in a timely manner, the Creditor on a home loan is required to accept repayment of all mortgage arrearages through a Chapter 13 plan. Chapter 13 is similar to a debt consolidation. The Debtors pay one single monthly payment to the Bankruptcy Trustee assigned to their case, and the Trustee distributes the funds among all of the Debtors' Creditors as set forth in the Debtors' Chapter 13 Plan, formulated by the Debtors and their bankruptcy attorney. A portion of the single monthly payment is applied to the mortgage arrearages over the three to five year plan period.
Under Utah law, a home lender holding a Deed of Trust recorded against a Debtor's home can complete foreclosure proceedings within about 60 days after submitting proper notice. The filing of a Chapter 13 case stops a foreclosure sale immediately upon filing. This is true even if a Debtor files a Chapter 13 bankruptcy one hour before a foreclosure sale. The Debtor will then proceed to formulate a plan to re-pay their Creditors and catch up on all delinquent payments on the home to save the home.
CHAPTER 7 CAN PRESERVE THE EQUITY IN A DEBTOR'S HOME.
Debtors who are seriously in debt and are contemplating debt consolidation by borrowing against their homes should seriously consider bankruptcy options available to them under Chapter 7. Incurring long-term indebtedness against the Debtors' primary residence often results in excessively high payments which the Debtors are unable to sustain over the duration of the loan. If the Debtors are forced to incur additional debt after borrowing against their homes, or if they are unable to borrow sufficient funds against their homes to consolidate all of their debt, they are vulnerable to losing their homes upon any change in their financial situation.
The Homestead Laws in the State of Utah were amended in 1999 and are very favorable to bankruptcy Debtors. The present Homestead exemption for a primary residence is $20,000.00 per individual and $40,000.00 per couple. Instead of borrowing against their homes, Debtors who are current in payments on all loans against their homes, can file Chapter 7 bankruptcy, eliminate most of their other debt, and emerge from Chapter 7 with the equity in their homes intact by claiming up to $20,000.00 to $40,000.00 of the equity in their homes exempt.
If the Debtors' home equity exceeds the limits of the Homestead described above, a Chapter 7 option would not be available to them as their homes could be taken and sold by the Bankruptcy Trustee. Debtors with equity exceeding $20,000 per individual or $40,000 per couple should consider filing Chapter 13 to resolve their financial difficulties.