Should a husband or wife consent to relief from the automatic stay if he or she falls behind on the mortgage payments during a chapter 13 case in Virginia?
One of the best reasons for filing a chapter 13 bankruptcy case is to save a home from foreclosure by allowing the homeowner to make the regular post-petition mortgage payments directly to the mortgage lender outside the plan while the arrearage amount is cured in the plan through the plan payments. Alternatively, a chapter 13 debtor may propose to sell or refinance a home with equity at some point in the plan to cure a default. The homeowner in chapter 13 receives the protection of the automatic stay in bankruptcy found in Section 362 of the Bankruptcy Code, which prevents the creditors from trying to collect a pre-petition debt from the debtor, the debtor’s property, or the property of the estate. This stops the mortgage lender from selling the debtor’s home at a foreclosure auction in Virginia.
Despite the best of intentions, statistics tell us that the vast majority of chapter 13 cases are not successfully completed to allow a homeowner to save his or her home. This may happen in one of two ways, because the case is dismissed or because the lender obtains relief from the automatic stay and forecloses on the home. A case may be jeopardized due to an unanticipated setback while the case is pending such as a job loss or unexpected illness. In spite of these setbacks, a debtor may still be able to save the bankruptcy case itself by filing an amended or modified chapter 13 plan which makes up for missed plan payments, or by re-filing a second chapter 13 case when the debtor is back on his or her feet, provided the lender has not yet foreclosed. If the debtor is married and the other spouse has not filed bankruptcy, the other spouse may wish to file his or her own chapter 13 case to save the home from foreclosure.
If, on the other hand, the case is continuing, but the debtor fails to make one or more of the regular mortgage payments directly to the lender, the lender will often file a Motion for Relief from the Automatic Stay, asking the bankruptcy judge to allow the lender to pursue the lender’s state law rights and remedies, including a foreclosure sale of the property in Virginia.
The debtor has a number of options when responding to a Motion for Relief from Stay. A debtor may wish to contest the matter and request an evidentiary hearing on the issue of whether cause exists for relief from stay. Sometimes the mortgage lender has not properly accounted for the post-petition payments made, or the party filing the motion is not the proper party or does not have standing to enforce the mortgage note in bankruptcy court. On the other hand, a debtor may decide not to contest the motion or to consent to relief from stay. If the case is close to dismissal for other grounds, such as default in the plan payments, the debtor may simply allow the case to be dismissed without addressing the motion, relying on the possibility of a good faith re-filing with a motion to extend or impose the automatic stay. Again, in the case of a married couple where only one spouse has filed bankruptcy, the other spouse may now wish to file a separate chapter 13 case to save their home from foreclosure.
Perhaps the most common, though not always most advantageous, resolution of a Motion for Relief from Stay in U.S. Bankruptcy Court for the Eastern District of Virginia is known as a “drop dead order” or a “six month cure order”. This order provides that the debtor will make up for the missed payments, plus attorney’s fees and costs, by making extra direct payments for six months to bring the post-petition account current. This often imposes an impossible burden on a cash-strapped chapter 13 debtor, who is also responsible for making plan payments and the regular mortgage payments at the same time, particularly if all of the debtor’s disposable income is being devoted to plan payments. If the debtor defaults in the regular payments or extra 6 payments under the drop dead order, then the lender may have to first file an affidavit of default, which, if unanswered, allows the mortgage lender to resort to its state law rights.
Under the holding of Matter of Mendoza, 111 F.3d 1264 (C.A.5 (Tex), 1997), the debtor has another option. In certain circumstances, a debtor may be able to put the post-petition arrearage into a modified plan, to be cured along with pre-petition arrearage. The Mendoza holding rests on the existence of equitable grounds allowing modification in the circumstances and on the particular language of 11 U.S.C. 1322(b)(5) which does not expressly limit the debtor’s right to cure a default to a pre-petition default.
You should consult with your Virginia bankruptcy attorney concerning all of your options when you must respond to a Motion for Relief from Stay in your chapter 13 bankruptcy case.