In our last post, we posed the question of what a bank may do in the event of a failed Chapter 13 bankruptcy. We looked at the main reasons one might file for a Chapter 13 bankruptcy in the first place, and in this post we look at why a failed Chapter 13 plan may end up in home foreclosure, and what the borrower can do to avoid that situation.

According to our source, it is always possible to save one's home in such a situation, but it would require the cooperation of the bank. And because borrowers typically file for Chapter 13 bankruptcy because the bank will not grant a loan modification or work with their situation, the bank may end up foreclosing in the event of a failed Chapter 13 plan.

During term of a Chapter 13 bankruptcy, a bank may not refuse a borrower's regular monthly payment and must allow the payments to be spread out over the terms of the court-approved plan.

The court cannot force the bank to change the terms of the loan until delinquent balance is paid. While the borrower can reapply for loan modification while making Chapter 13 payments, not all banks will be willing to do this. Some banks may require the borrower to demonstrate a history of 12 monthly payments, and this is their right.

In the event that the bank refuses to cooperate with you, you will need to remain in Chapter 13 until you are caught up with mortgage payments, if you wish to avoid foreclosure.

Our source states that, in some instances, individuals may be denied a loan modification prior to a Chapter 13 filing, but the bank may later decide to grant a modification if the Chapter 13 bankruptcy fails. In this case, the bank does the borrower a favor. Lenders are under no obligation to accept payments if the borrower becomes delinquent, though banks must accept payments if the borrower is current on their mortgage payment.

In other words, the one way to ensure that you keep your home is to remain current on payments to the court and the lender every month for the whole of the bankruptcy period. It would be a risky move to convert to Chapter 7 while one is still behind on previous mortgage payments in a Chapter 13 plan.

Source: www.bankrate.com, "Failed Chapter 13 bankruptcy may cost home," Justin Harelik, 15 Feb 2011.