If you are facing foreclosure in New York and have regular income, Chapter 13 bankruptcy may be your most powerful tool. Unlike Chapter 7, which liquidates assets, Chapter 13 allows you to keep your home while catching up on missed mortgage payments over a three-to-five-year repayment plan.
How the Automatic Stay Stops Foreclosure
The moment your Chapter 13 petition is filed with the bankruptcy court, an automatic stay goes into effect. This immediately halts all foreclosure proceedings — including a scheduled auction. The lender cannot continue the foreclosure action, contact you about the debt, or take any collection action without court permission.
The automatic stay gives you breathing room to propose a repayment plan and negotiate with your lender through the bankruptcy process. However, the lender can file a motion for relief from stay if you fail to make payments or if the bankruptcy was filed in bad faith.
Curing Mortgage Arrears Through Your Plan
The central power of Chapter 13 for homeowners is the ability to cure mortgage arrears over the life of your plan. If you are $20,000 behind on your mortgage, you can spread that amount over 36 to 60 months while continuing to make regular monthly payments going forward.
Your plan payment includes the arrears cure amount plus payments to other creditors. At the end of the plan, your mortgage is fully current and the foreclosure action is dismissed. You keep your home with a clean slate.
Eligibility Requirements
To file Chapter 13, you must have regular income sufficient to fund a repayment plan. There are also debt limits — your secured debts cannot exceed approximately $2.75 million and unsecured debts cannot exceed approximately $419,275 (these limits are adjusted periodically).
You must also complete credit counseling before filing and a financial management course before discharge. Your attorney will help you determine if you meet all eligibility requirements.
What to Expect During Your Plan
Chapter 13 is a commitment. For three to five years, you will make regular plan payments to a bankruptcy trustee who distributes the funds to your creditors according to the plan. You must stay current on all ongoing obligations — mortgage, taxes, insurance — while making plan payments.
Missing plan payments can result in dismissal of your case, which would allow the foreclosure to resume. However, if your circumstances change, you can modify your plan with court approval.
Life After Chapter 13
Upon successful completion of your plan, remaining eligible unsecured debts are discharged, your mortgage is current, and you own your home free of the foreclosure threat. Chapter 13 remains on your credit report for seven years from the filing date, but many people find their credit recovering well before that period ends.
The discipline of making regular plan payments also helps establish positive financial habits that serve you well after discharge.