When past-due statements are piling up, and you don't want to lose the house, a Chapter 13 bankruptcy might be the right solution.

Having your back against the wall in any situation can leave you feeling like you're caught in a Choose Your Own Adventure children's story: If you decide to cross the river, turn to page 7. If you decide to go back down the trail, turn to page 8. Unfortunately, real life isn't quite that cut-and-dried, particularly when the conflict involves burdensome debt payments.

If your blood pressure starts rising faster than the impending rate increase on your adjustable-rate mortgage, it's time to make a plan. Refinancing that debt with an affordable, fixed-rate mortgage is often the ideal solution. Unfortunately, as many homeowners are now realizing, the mortgage markets aren't as welcoming as they used to be. Refinance mortgages are in short supply, particularly for lesser qualified applicants.

Many debtors are finding comfort in a second-best solution: Chapter 13 bankruptcy. This option is appealing to homeowners because it allows them to avoid foreclosure. The other option, Chapter 7 bankruptcy, generally results in liquidation of the debtor's property, including real estate. Given the shockwaves running through the housing and mortgage industries, it isn't surprising that Chapter 13 filings are on the rise.

Bankruptcy basics


Chapter 13 bankruptcy is best suited for gainfully employed individuals who've had a temporary economic setback. It isn't going to wipe away the debt, but it will allow for short-term debt reorganization. As part of the filing process, the debtor must create a plan to repay the past-due bills within three to five years. While making those payments, the debtor must also stay current on all other bills that come due. Meanwhile, the court prohibits creditors from pursuing collections or legal proceedings, including foreclosure.

Chapter 13 is not without its disadvantages, however. Debtors who can't afford their current mortgage payments aren't suitable candidates. This, unfortunately, excludes many of today's homeowners who are caught in overpriced, adjustable-rate mortgages.

Further, the court expects that all of a borrower's excess cash flow will go towards the debt repayment. Debtors, therefore, have little budget room for surprise expenses during that repayment period. Some borrowers who can't keep up with current bills and the repayments might end up filing for Chapter 7 bankruptcy, anyway, which also adds legal costs.

A Chapter 13 filing also does serious damage to the debtor's credit score. Notification of the filing remains on the credit report for up to 10 years, which makes for a slow financial recovery.

Despite the drawbacks, debtors who need help catching up on past-due mortgage payments might find Chapter 13 the most attractive alternative.

Just like the Choose Your Own Adventure stories, a debt problem presents limited options for resolution. You'll simply have to choose which one seems best for your situation. The sooner you do that, the sooner you can move on to the next chapter of your financial future.

Published on November 30, 2007