When a person files bankruptcy, an automatic stay goes into effect preventing the creditors from continuing further collection activity. What will occur with delinquent mortgages following the stay's lifting depends largely on the type of petition filed. A debtor who chooses to file a Chapter 13 bankruptcy petition may be able to catch up on the back payments and thus save the home from going into foreclosure.
Chapter 13 bankruptcy is also known as a voluntary reorganization of debt. In this chapter, the debtor will operate under a repayment plan that will last between three and five years. During the term of the plan, the debtor will be required to make the payments required by its terms. Stretching out the delinquent amount over the repayment plan period can provide the debtor a longer time to catch up. The mortgage payments will still need to be made on time during the plan as well.
If a debtor has a second mortgage, the trustee may convert the mortgage into an unsecured debt if the debtor has little equity in the property. The second mortgage will then be paid just as the other unsecured debts, often at a significantly lower amount than what was owed. At the successful completion of the plan, the remaining unsecured amount will be discharged, obviating the debtor's responsibility for paying it.
Chapter 13 bankruptcy takes much longer than Chapter 7, but under the reorganization option, the debtor may be able to save the home from going into foreclosure. A person who is in danger of foreclosure may want to file a petition immediately in order to stop the proceedings and have time to catch up the delinquency owed. A bankruptcy attorney might be able to help a client in such a situation.
Source: sfgate.com, "What Do Mortgage Companies Do With Chapter 13 Bankruptcy?", M.C. Postins, accessed on Jan. 10, 2015