Chapter 13 Attorneys, Nassau & Suffolk Counties, Long Island

In a “traditional” or “catch-up” plan, the client goes back to making post-petition mortgage payments and, in addition, makes monthly Chapter 13 plan payments on pre-petition arrears and debt to a court-appointed trustee. The combination keeps the client from falling further behind while catching up on the arrears that existed before filing. Secured debt such as mortgage arrears, and priority debt such as taxes, must be paid in full over the plan, while unsecured credit card debt can be paid at a percentage on the dollar.

Because many foreclosures involve mortgage arrears of many years that are too high to cure over a 60-month plan, seeking a mortgage loan modification through Loss Mitigation programs adopted by most Bankruptcy Courts has become a standard approach. Loss Mitigation is the pursuit of a mortgage modification by the debtor, overseen and encouraged by the Bankruptcy Court, which can pressure both the debtor’s and lender’s attorneys to coordinate over documents and information to determine whether the debtor qualifies for a modification. During the process, the debtor pays the hypothetical modified payment under the plan to the trustee to demonstrate an ability to sustain the modification.

The differences are stark: the traditional plan is more expensive but generally safer, since its success depends on payments rather than on approval of a modification. The loss-mitigation plan is less expensive month-to-month, but it is not “guaranteed” because it depends on the lender approving the debtor’s modification application. An advantage of loss mitigation is that the lender is usually more amenable to a modification when it must justify its decisions to a bankruptcy judge.

A Chapter 13 case does not usually expose the debtor to the same asset or income risks as a Chapter 7 case. Chapter 7 is quicker and, if successful, handles most debts more efficiently and finally by simply eliminating them — but it has more risk in terms of eligibility, and it has no reorganization ability. Chapter 13’s main risk is whether the debtor can sustain the plan payments over five years. Where a client can qualify for both and needs both, a Chapter 7 can be filed first to discharge unsecured debt, followed by a Chapter 13 to deal with mortgage arrears — a sequence nicknamed a “Chapter 20” that requires careful pivoting of the budget.

Versus a mortgage modification negotiation: a modification seeks to lower the monthly payment and restructure the loan on advantageous terms, which, if obtained, exceed what a “traditional” Chapter 13 achieves — but modifications are at the discretion of the mortgage holder and are not always obtainable. By contrast, the 5-year traditional Chapter 13 plan is imposed on the lender, who must accept regular post-petition payments as long as the debtor stays current. A “loss mitigation” Chapter 13 plan is similar to a modification negotiation, but pursues the modification inside the case — adding the protection of the automatic stay, loss-mitigation hearings, and court oversight. In simpler situations where the foreclosure is not advanced and direct negotiation is feasible, a modification without the structure of a Chapter 13 case can be preferable.