The Chapter 13 Payment

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The Importance of On-Time Chapter 13 Trustee Payments

The monthly payments you make to the Chapter 13 Trustee are just as important to make on-time as are your mortgage, vehicle loan or post-filing credit card payment. By on-time, we mean that the payment must be received by the Trustee and posted to your account in the month the payment is due. The postmark date doesn’t count. Doubling up on payments when late does not count. That which matters is when your payment is posted to your account. For example, if the payment is due in December, it must be posted in December.

While your Chapter 13 payments are not reported to the credit bureaus, when you apply for a mortgage (refinance or purchase) while in a Chapter 13 Plan or within a year of your bankruptcy Discharge, your Chapter 13 payment history will be reviewed by the underwriter. This review will consider your Chapter 13 payment with the same weight as a mortgage payment.  Just one 30 day late payment will disqualify an otherwise approvable loan applicant.

Exactly What Is A 30 Day Late Payment?

To illustrate, let’s say your payment is due on December 25th. Your payment has always been made on the 25th. In fact, your November 25th payment was received by the Trustee and posted in November. However, your December 25th payment was not posted until January 2nd. Oops, you now have a 30-day late payment.

The Payment Was Sent the Same Day as Always

We understand. However, the system does not understand accidental, postal or electronic delays. Indeed, the system can be harsh. Being armed with the knowledge allows you to plan for the unexpected.

Rehabilitation Expectation – Minimum of 12 Months On-Time Payments

A minimum of twelve consecutive months of on-time payments immediately prior to applying for mortgage credit is essential for approval. This supposes that all payments have been posted on time with the Trustee’s office. However, there can be an exception of a 30-day late during the payment period so long as that isolated incident is not within the last twelve months. The exception of a 30-day late payment or an interruption of on-time monthly payments must be documented and sourced as completely outside the control of the debtor.

The Blizzard Made My Payment Late

A few years back, one of my prospective Chapter 13 home buyers diligently worked to get into a position to be approved for a new home loan. By way of background, at the time he lived in a cabin at St Mary’s Glacier. That year, there was a particularly severe snow event which left my prospective client snow-bound for several days. Still, his payment to the Trustee was only one day late. We argued that this was an Act of God and entirely out of my prospective client’s control. This held no sway with the underwriter and my prospective borrower was not approved. In the interest of full disclosure, this prospective client had another 30-day late payment about 15 months prior to the blizzard. The ‘Act of God’ defense might have worked had the previous late payment not been of record.

Automatic Bill Pay – Be Aware

Those of us that use on-line bill pay through our credit union or bank love the convenience. No stamps, no envelopes and no checks are but a few of the nice features. While in a Chapter 13 bankruptcy repayment plan, set your payment date early enough so there is sufficient time for the Trustee’s office to 1) receive your payment and 2) post your payment. Be aware of Federal holidays and back your payment date up a couple of extra days to make sure you never have a Chapter 13 late payment.

The Trustee’s Staff Said a Late Payment Is OK

We understand. While a single late Trustee payment (or two) will generally not cause for a Chapter 13 to be problematic or Dismissed, keep in mind, the Trustee is not your mortgage loan originator or mortgage lender.

The Trustee said it is ok do pay my Plan payments ahead of time. Talk to your attorney, this could be a problem.

What Is the Take Away of This Post?

For those with payments due to be in the Trustee’s office near the end of the month, we strongly suggest that you mail your payment a few days early every month to help ensure the payment is posted in a timely manner. Better yet, set the bankruptcy payment to be made via payroll deduction. If payroll deduction is not available, schedule an automatic monthly payment via your on-line banking. Be ready and able to prove you did make your payments on time.

Unpaid Mortgage Payments Can Cause a Discharge to be Denied

Let’s say one is in the final month or so of their Chapter 13 Payment Plan and the Trustee learns the mortgage payments, which was to have been paid outside the Chapter 13 Plan, were not paid. The Discharge can be denied. Ouch!  For more information, read this article.

We wish you success with your Chapter 13 Payment Plan!

Image attribution

Financially Speaking™  James Spray, RMLO, CNE, FICO Pro  | CO LMO 100008715 | NMLS 257365 | December 2, 2013 | Updated January 10, 2017

 Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part provided you give complete attribution to James Spray.

9 comments on “The Chapter 13 Payment

  1. My chapter 13 payments are deducted from my check. When I check my statements it looks as though the trustee is submitting the payments late to the company my car loan belongs too. On my credit reports, it shows 11 late payments! What can I do about this? Or what can I do to help improve my credit?

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    • James Spray says:

      Mary, I don’t have an easy answer for your situation. I do observe that such as you describe is contrary to assisting you in getting a fresh start as is the spirit of the bankruptcy laws in the US.

      Write to your attorney explaining the situation. Include a copy of your

      with the late payments highlighted and ask that s/he provide assistance in getting corrective action going forward.

      Keep in mind that such a request will very likely be outside the scope of your Court Approved Plan and as a result you may expect to pay an additional fee for additional legal services.

      Best wishes for your success and please keep us posted.

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  2. Ashley says:

    Hi James. I am at the point where I want to convert my Chapter 13 to a Chapter 7 (I will sign the papers on Tuesday if I decide to go ahead with it) but I have some concerns. I am three years into a chapter 13 and all my payments have been on time. If the conversion is not approved, do I lose the protection of the chapter 13 (will it be dismissed, even though I have paid three years into it)? I have high income on paper but it’s not really that high because I support five dependants; one of them is my husband who is very sick (he’s been hospitalized over seven times in the last few months) and two special needs children. The chapter 7 will allow me to give up the house and car (both huge financial strains on me) and it will put me in a better position to be able to get student loans/grants for my daughter who starts college this fall. Could you please give me some advice/suggestions on this? The pros and cons and consequences? I live in Georgia. Thank you.

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    • James Spray says:

      Hello Ashley: Many of your questions require a GA bankruptcy attorney to answer as they require legal conclusions and such based on local rules. I am not an attorney and I am not familiar with GA foreclosure laws. What I will say is that if by surrendering the house and vehicle free you of those financial burdens and you are able to meet your housing and transportation needs, do what you need to do. Keep in mind that until such time as the property is sold or foreclosed, you have the right to occupy the premises. Speak with your attorney about the timeline of such occupancy in GA. As to college loans, many folks find they are better off avoiding private student loans and favor government student loans instead. On this subject, speak with the folks at the financial aid offices of the schools your daughter is considering.

      Our best wishes are with you and yours!

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      • Ashley says:

        Thanks, James. I will be meeting with the lawyer this coming week. I really appreciate the information on the house occupancy. I will definitely follow up with the lawyer on that. Have a wonderful weekend!

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      • James Spray says:

        Please keep us posted. Again, our best thoughts and wishes are with you.

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      • Ashley says:

        Hi James. Things have changed since I last contacted you on my situation and I would appreciate your advice/input. I filed a Chapter 13 bankruptcy in 2012 and I only have about seven months left to complete my payments. The problem I have is with my house. At the time I filed the bankruptcy, I wanted to try and keep a roof over my family’s head so I decided to keep the house. Since then, I have missed about three payments and the mortgage company has now filed a motion for relief from stay which will be granted today since I don’t have the down payment they are requesting on a payment arrangement. Once the stay is lifted, they will probably move to foreclose on the house. On one hand, I’m not really mourning the loss of the house; I’m under water on the mortgage (no equity whatsoever), the neighborhood/area has declined and my kids do not even attend school in the area so I have been wanting to move since the Spring. I’ve tried to sell it with no luck. My main concern or issue at this point is how the foreclosure will effect my credit going forward. I have worked diligently in bankruptcy over the last few years to build my credit back, following your advice and suggestions. As it stands now, even in bankruptcy, my scores are between 600 and 610. I was told by one lawyer that since this house situation was part of my original bankruptcy, it will be updated on my credit report as “surrendered in bankruptcy” and the foreclosure will not be considered a new account. I have since received conflicting information on this. Is this true? How will it be reflected on my credit report? If it is reported as a new delinquent account, what is my recourse with the credit agencies? My bankruptcy lawyer suggested I try and work on a loan modification with them. I will if it saves the negative impact on my credit but (1) there is no guarantee they will agree to one and (2) it will be loan modification on a house I don’t want. Will I ever be able to buy a house again after all this? I am hoping that in about three years I will but I’m not sure it’s possible anymore. I would appreciate any advice you can give me on this.. In the meantime, what is the best way to go about renting a house when you are in a chapter 13?

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      • James Spray says:

        Hello Ashley,

        Given the new derogatory information of late payments to the mortgage company have happened, they will be reported in your credit history. The foreclosure will also show as a new derogatory event. However, all may not be lost and you will again be able to purchase a home. Read this post titled FNMA Updated Bankruptcy, Foreclosure and Short Sale Policies to get some insight as to the timeline. Regarding FHA, you are three years from the date of the foreclosure sale or short-sale; this will be the timeline driver as you’ll have the required 2 years from the bankruptcy Discharge behind you.

        On the foreclosure, I am not familiar with your State’s foreclosure laws. These will determine how soon the sale can occur after the mortgage company has been granted Relief from the Stay. You may have a period of time during the foreclosure process to live, essentially, rent free. If you are not paying your homeowner insurance outside the mortgage payment, be sure to get a renters insurance policy to cover your personal property. These policies are quite inexpensive.

        Regarding renting after the above, it depends on a few factors, including the amount of available rental inventory in your market. If there are a number of vacancies, the rental guidelines tend to be a little looser than in times of shortages in the inventory. For suggestions on how to deal with a rental given your present circumstances you may the suggestions in this post titled, Renting after Bankruptcy and/or Foreclosure helpful.

        Again, please keep us posted. Our best thoughts and wishes are still with you!

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      • Ashley says:

        Thank you. It seems like the light at the end of the tunnel is not as close as I thought. I will keep you posted on what happens next. I really appreciate your help!

        Like

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