What Type of Mortgage Do You Have?

The first thing you need to consider in order to determine whether a Chapter 13 is the best course of action for your situation is whether you have a fixed rate mortgage or an ARM (Adjustable Rate Mortgage). If you have a fixed rate mortgage (a mortgage that will not change interest rates throughout the life of the loan), it will be easier to predict the affordability of your chapter 13 plan for the next three to five years. If you have an ARM, which will be adjusting before the next three to five years passes, it will be much more difficult to succeed with the chapter 13 unless you are able to negotiate with the mortgage company ahead of time to keep the interest at the same rate, which may or may not be possible. That isn't to say that it is impossible to succeed with a chapter 13 bankruptcy if you have an ARM, but it is important to understand that it will be harder to pay for the adjusted payments plus the plan payment than with a fixed mortgage payment.


Determine the Total Amount of Your Mortgage Arrears

A crucial part of determining what you will have to pay into your plan, includes calculating what your total mortgage arrears are. It can be difficult to get an exact number, even from the mortgage company, so rounding up is usually a safe bet. To get an idea of how much your plan payment has to be at minimum to save your house requires that you at least pay all the mortgage arrears through the plan. It is also possible to pay the mortgage through the plan, if it is easier to make sure you make the payment by having one payment instead of two. To get an idea of how much of your plan payment will go to mortgage arrears, take the total arrears and divide by 36 or 60. How long your plan will be depends on various factors addressed in what is commonly called the means test. The worst case scenario is that your plan would be 60 months. Depending on your jurisdiction you can opt for a 60 month plan even if you qualify for a 60 month plan, in case you cannot afford 36 a month plan.


Determine Your Monthly Income and Expenses

You need to determine whether you can actually afford the monthly plan payments. The bankruptcy court looks at you income for the past six months (only requires that you provide proof of income from all sources for the past 60 days to the trustee, however) to determine what your monthly income is for the means test, but to calculate your plan payment you need to look at your current monthly income. If you have a seasonal type job, like a construction job where your income fluctuates, you may want to look at the entire year to figure out what your monthly income is. Once you determine what your income is, look closely at what your monthly expenses are. Do not include payments on dischargeable unsecured debts like credit cards and medical bills. Look only at your living expenses, and payments on secured debts and nondischargeable debts that you will prefer to pay directly rather than through the bankruptcy plan.


Determine if Your Disposable Income is Sufficient to Get You Caught Up on Your Mortgage

Now that you have figured out what your income and expenses are, and you know what kind of monthly payment, at minimum, is required to pay the arrears of the mortgage, you need to look at your disposable income which is your income minus monthly living expenses. Hopefully, the disposable income is at least somewhat more than the monthly payment amount would need to be to pay the mortgage and the arrears, as you also pay a fee to the trustee through your plan, and possibly other debts and your attorney's fees. If the income is lower than what you would have to pay to get caught up within 5 years, then you will not be able to get your plan approved by the bankruptcy court. If you have a variable rate mortgage, you will have to consider that your payments can go up significantly for the current mortgage payments and that could negatively impact your ability to succeed with your plan down the road even though it would not effect you immediately.