Anyone with a mortgage or other large loan either has an escrow account or knows about the function of one. Escrow accounts are set up with a third-party agent or broker who manages and distributes the money in that account. The account works as a consolidation system for a mortgagor, holding values required to make a single payment for the monthly loan, interest, taxes, and insurance. Escrow amounts will change over time based on the cost of property taxes, insurance rates, and other taxes. If you have an escrow account and you find yourself in a situation where you must file for Chapter 13 bankruptcy in Owatonna, MN, Behm Law Group Ltd. can help you understand how it will affect the account and guide you through the process of filing bankruptcy overall.
Chapter 13 bankruptcy works to reorganize your debts into a three- to five-year repayment plan. The reorganization plan is an extremely valuable option for those with a steady income who don’t want to work through the asset liquidation process of a Chapter 7. A repayment plan typically takes priority, secured, and unsecured debts, and rolls them into a single monthly payment made to a bankruptcy trustee.
While large portions of your unsecured debts are discharged in a chapter 13 repayment plan, your priority debts, such as tax debts, child support debts and alimony, and secured debts on assets that you want to retain, such as vehicles and houses, must be repaid. Because your mortgage is a secured debt, it must be paid in full but typically you will continue making the regular monthly mortgage payments directly to the mortgage lender rather than through the chapter 13 trustee. In many cases, the debt leading up to a bankruptcy and a Chapter 13 plan itself can affect mortgage escrow in two ways:
- Pre-petition arrearage: If you have been unable to meet full escrow payments even before you file for bankruptcy, you will have an escrow shortage, and therefore, be in arrears. In this case, the court will treat the shortage like a typical mortgage arrearage and require it to be repaid in full throughout the repayment period. Unlike a mortgage, however, the shortage amount does not incur interest.
- Post-petition arrearage: When you enter a repayment plan, you have to meet escrow payments as a part of the consolidated monthly payment that’s due. If you can’t meet this payment and you become short on escrow, you may be in danger of a case dismissal if you do not take steps to propose and work through a repayment plan adjustment.
The three to five years you are working through a Chapter 13 plan require you to be conscious of your finances and to maintain a strict adherence to your budget. The financial struggles that put you into the position of filing for Chapter 13 bankruptcy must be put behind you, and the court expects you to understand the responsibilities of a repayment plan.
That said, there will be room for adjustments to be made throughout the repayment period depending on your income and your costs of living. If you are considering filing for Chapter 13 bankruptcy in Owatonna, MN, contact Behm Law Group Ltd. at (507) 387-7200 today.