January 20, 2020

Cost of Chapter 13 May Outweigh Its Benefits

Yesterday, I met with a potential client who was facing immediate foreclosure (today) and I encouraged him not to file Chapter 13 to stop the foreclosure.

During the course of our discussion, I learned:

  1. that he had previously filed a pro se Chapter 13 earlier this year that was dismissed for non-payment
  2. because of a reduction in overtime hours, this potential client did not have sufficient income to pay his regular mortgage payment, much less contribute to a plan to cure his arrearage
  3. he had been in his house for less than a year and had no equity (and actually owed more than the property was worth when late fees and penalties were included)
  4. his real estate agent was pushing him to file the 13 because she had a potential buyer lined up
  5. he was very concerned that a foreclosure would cause damage to his credit

I expressed to this gentleman that, in my opinion, Chapter 13 was a waste of his money.  Here is why:

  1. we could not propose a feasible plan since he did not have enough disposable income to pay his regular mortgage, much less contribute to a Chapter 13 plan
  2. his credit was most likely already badly damaged because of his first unsuccessful bankruptcy and his failure to pay his first or second mortgage for almost a year.  A foreclosure would likely not cause significantly more damage
  3. if he was to stop the foreclosure for the purpose of selling the property, how would he close?  The total debt on the property exceeded the sales price – he would walk out of closing owing $10,000 to $20,000
  4. deficiency judgments arising from foreclosures are rare in Georgia – should the mortgage lender pursue him, we could look at filing a Chapter 7 down the road
  5. given the current bias against 2nd filings, it is possible that the lender would foreclose in escrow then immediately petition the Bankruptcy Court for an Order validating the foreclosure
  6. because second cases require extra work – a Motion to Extend the Stay – I have to charge more up front.  In this case, the potential debtor was basically telling me that he had no desire or intention to stay in this Chapter 13 for more than a month.  As such, I would have to charge  $2,500 up front + the filing fee.
  7. the primary practical problem that the potential client faced – he and his family would have to move fairly quickly

I expressed that in my view, it made little sense to spend thousands of dollars for the hope that he could stay in his house for a few weeks to months.  Instead, use his cash reserves to move and find a place to live.  I closed by saying that I would file a Chapter 13 for him if he insisted, but that in my view he was wasting his time and money.

Do you agree with my analysis? 

[tags] Chapter 13, pending foreclosure, Georgia foreclosure, foreclosure Fulton County, stop foreclosure, bankruptcy, bankruptcy analysis, re-filed case, motion to extend stay [/tags]

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.


  1. I recently heard a story about a debtor who was persuaded by a real estate “investor” to file a BR case on the eve of foreclosure, proceed with the closing on the home post-petition (in violation of BR laws), then fail to attend the 341 and have the case dismissed. Unfortunately for the debtor, the entire plan feel apart very quickly and likely will not work out to well for any of the parties (and the lawyer). As in your case, it is up to the lawyers to be more than document preparation services and actually look at the facts and what is best for the would-be debtor.

  2. It sounds to me like your analysis was correct. The most difficult concept for any homeowner in the same or similar circumstances is grasping the reality that they are not really saving their home – because there is nothing to save. Mortgage payments on homes with no equity are more like rent payments. In Massachusetts, we are in a declining real estate market. If he were in Mass, the debtor’s defiiciency of $10-20K could be more as time went on.

  3. Jim Cockerham says

    I have a client that filed Chapter 13 and surrendered the home as part of the plan. The lienholder is now performing foreclosure activities to transfer property from my client the them. Is there any way to voluntarily surrender the property and not incur the foreclosure activities? What will show on credit reporting. The Chapter 13 is already on the reports, but now a foreclosure is also being listed.

  4. Jim, you might contact the lender and see if they will agree to a deed in lieu of foreclosure. The lender needs to get title transferred. Some lenders won’t do deeds in lieu under any circumstances, but it does not hurt to ask.

Speak Your Mind


Page optimized by WP Minify WordPress Plugin