In a typical chapter 13 New York bankruptcy repayment plan, the debtor pays any prepetition mortgage arrearages in the regular plan payments to the trustee in full and any post-petition mortgage payments directly to the lender as though the bankruptcy had not occurred. Two separate payments might be cumbersome to debtors, so the question is why not consolidate them into the plan payments to the trustee? This is what’s referred to as a “conduit provision” in the chapter 13 plan, essentially treating the plan as a conduit for payments to the mortgage lender.
There are benefits and drawbacks:
Benefits: The primary advantage of a conduit provision for a mortgage is that debtors have to deal with only one party and issue only one payment at a time. If debtors find themselves in the unlucky situation of defaulting on both their plans and their mortgages, then they will face a dismissal motion by the trustee and a motion for relief from the automatic stay by the mortgage lender to initiate (or resume) a foreclosure on debtors’ homes. It’s a lot easier to deal with the trustee than a mortgage lender too, as the trustee has more of an interest in the plan succeeding than the lender does.
Drawbacks: The total cost of the plan including the post-petition mortgage payments is greater than paying them separately. Why? The reason is the trustee’s fees. A chapter 13 bankruptcy trustee can receive up to 10 percent of the plan’s payments in fees. Again, this is why the trustee has an interest in the plan succeeding. Consequently, debtors will need to pay up to ten percent more for their preexisting mortgages per month than if they paid it separately. In other words, debtors wind up paying the trustee for a service they were doing on their own all along (if they hadn’t fallen behind on their mortgages before filing bankruptcy). As mortgages aren’t cheap, neither are the fees added in. A $1,000 monthly mortgage payment can mean an additional $100 to the trustee. Some debtors might not be able to afford this, and it might interfere with their abilities to repay unsecured creditors.
There are other factors for debtors to consider. For one, as with debtors surrendering property in bankruptcy, a lender that delays filing foreclosure paperwork can leave debtors holding onto property they don’t actually want—and with a mortgage liability. Of course, debtors can also save money with conduit provisions thanks to fewer legal hassles (and even their own attorneys’ fees).
Depending on your circumstances, including a conduit provision in your chapter 13 plan might be to your advantage, or it might just waste money. Deciding which course of action to take is why it’s crucial to hire an experienced New York bankruptcy lawyer to handle your case.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney New York Bruce Weiner for a free initial consultation.
