Behind on the Mortgage: The Math of a Chapter 13 Cure
A significant power of chapter 13 bankruptcy is the ability to propose a plan that cures a default associated with a long-term debt, i.e. to catch up a delinquent mortgage so that it is once again current. Due to this, chapter 13 is an option frequently considered by families who have fallen behind on their home mortgage payments. Understanding the basics of how a cure payment is calculated is important for appreciating the value and constraints of chapter 13.
The essence of curing a mortgage default in chapter 13 is paying the past due amount (the arrearage) over the course of the chapter 13 plan. The maximum plan length is 60 months, which is the longest one might have make the cure payments. As a simplification, the cure payment is roughly the total amount that is past-due at the time of the bankruptcy filing, divided by the plan length (a maximum of 60 months). If one was 6 months behind on a mortgage, the additional cure payment would at least 10% of the normal mortgage payment. If was 15 months behind, the additional payment would be at least 25% on top of the normal house payment. Cure payments are just one part of a chapter 13 plan payment. In a case involving a delinquent mortgage, the plan would generally include at least the regular mortgage payment, the cure payment, the standing trustee's commission, and a portion of the debtor's attorney's fee.
As one can see, as the missed payments add up, the math for computing a chapter 13 plan becomes increasingly less favorable. Compounding this difficulty is that once the lender begins the foreclosure process, they start incurring costs associated with the foreclosure. These costs, which can amount to thousands of dollars, must generally be also be paid to cure the mortgage default with chapter 13. There may also be interest on an arrearage amount.
All this begs the question of how many months behind on a mortgage is too many or too few for optimal use of chapter 13. However, this question is inherently fact-sensitive to an individual's overall finances and the exact debts involved, and can only be answered with careful analysis, which this blog post cannot provide. If you have the question of whether chapter 13 could help with your mortgage, it's a good time for an initial discussion with an attorney about your options.