May secured lenders foreclose during a Chapter 13 bankruptcy?

On Behalf of | Feb 2, 2022 | Business Litigation |

The U.S. Bankruptcy Code allows borrowers with a steady income to submit Chapter 13 bankruptcy petitions. Unlike Chapter 7, a borrower’s assets may not liquidate or return to creditors. With Chapter 13, a trustee works with a borrower to repay creditors through a payment plan that may last between three and five years.

Secured creditors generally have priority for repayment over unsecured creditors. The Administrative Office of the U.S. Courts website notes that secured creditors may retrieve their collateral when debtors do not have the means to repay underlying loans. If a borrower could afford to continue paying, however, a plan may show a secured lender receiving the collateral’s value.

A payment plan may include a mortgage note

The bankruptcy court must review and approve a petitioner’s payment plan. If a borrower chooses to keep a home and pay its mortgage, the petition must note this. The payment plan must include a borrower’s monthly mortgage obligations.

To obtain the court’s approval, a borrower must show proof of an updated mortgage account. If a petitioner missed loan payments, a secured lender may have begun the foreclosure procedure. By bringing the account out of arrears, however, a borrower may keep the home and continue paying the note.

A secured lender may begin foreclosure

As reported by Claims Journal, if a borrower has income to repay a mortgage, the court may send a secured creditor a notice to file a proof of debt claim. Filling out the form and checking the box marked as “security claim” confirms that the borrower has placed the home as collateral. After bankruptcy, if the borrower fails to pay as agreed, a secured lender may proceed with foreclosure.

Chapter 13 bankruptcy offers qualified petitioners the ability to enter into a payment plan. Secured lenders, however, have priority and may retake their property if a borrower defaults.

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