Choices When Behind on Mortgage Payments

Foreclosure Sign

The house payment is the single largest expense for many families. When finances get tight and bills start adding up, many people get behind on their mortgage payment. In North Carolina, recent statistics put about 3-4% of home mortgage loans at least 90 days past due. In this post, I briefly summarize the major options for a homeowner who has missed payments and has a mortgage is in default, including bankruptcy approaches.

Walking Away from the House

The first group of options concern giving up the house to the bank.

  1. Walk away from the mortgage. Walking away is a decision to stop payments and allow the lender to foreclose. One does not have to vacate immediately, but should be prepared to so on relatively short notice. If the eventual foreclosure sale does not pay off the mortgage, the bank usually has the right to sue you individually for the balance owed (creating a deficiency judgment).
  2. Deed in lieu of foreclosure. A deed in lieu involves agreement to transfer the property to the lender instead of foreclosing. In some cases, a deed in lieu may be less costly or damaging to credit scores. A deed in lieu does not necessarily prevent a lawsuit for the balance owed. It can be difficult get a bank to agree to accept a deed in lieu of foreclosure.
  3. Release of property in bankruptcy. Bankruptcy (chapter 7 or chapter 13) is sometimes used to clean up after walking away from a mortgage. Sometimes, if the homeowner has already given up the house by the steps above, a bankruptcy filing will be used to prevent the bank from collecting a deficiency balance. Other times, the bankruptcy case will release the property from the bankruptcy estate to be foreclosed.

Selling the House

Sometimes, selling the house to a third party can be more attractive than turning it over to the bank.

  1. Normal Sale. A normal sale of a house can be a very attractive way to pay off a mortgage and move on. The unfortunate reality is that market conditions make quickly selling a house at market price a difficult outcome to achieve. Nevertheless, if the value of your house supports it, it can be worthwhile to explore this option.
  2. Short Sale. A short sale is a negotiated outcome where the bank accepts less than the amount owed to remove its mortgage lien or deed of trust from the property, thereby facilitating sale to a third party. The impact of a short sale for the homeowner is mixed. In some respects, it may be better than having a foreclosure in the public record and credit history. However, it's still a negative credit event, and can leave a deficiency balance remaining to pay to the bank. When short sales are being proposed to a homeowner, care should be taken to consider how the sale benefits other parties -- short sales can be more attractive to purchasers, real estate agents, and sometimes banks than to the selling borrower. Short sales can be difficult to arrange.
  3. Selling with Bankruptcy Supervision. A less common strategy is to sell a house under a chapter 13 plan with court supervision. Depending on the particulars of a case, plan confirmation may be difficult to obtain. Such a plan would be most frequently proposed if careful marketing of the house could result in a more favorable outcome for the debtor and/or other creditors.

Catching up the Mortgage

Catching up the payments is the most direct response to getting behind on the payments.

  1. Voluntary cure of mortgage default. Banks often will accept the missed payments and resume treating the loan as current. However, they often want the money in one lump sum payment, which can be difficult to arrange.
  2. Cure in Chapter 13. Chapter 13 allows a debtor to propose to catch up missed payments over the course of chapter 13 plan. Such a plan can provide up to five years to repay the missed payments, and the bank does not have to agree to that repayment plan. This is a very common use of chapter 13 bankruptcy.

Modifying the Mortgage

Modifications include changes in interest rate, term extensions, recapitalization of arrearages, and principal adjustments. Modifications make mortgage payments more affordable.

  1. Voluntary Modification. A number of modification programs exist, including the federal government's HAMP program. While modifications do happen, the reality is that they are hard to obtain, especially to obtain quickly.
  2. Modification in Bankruptcy. It's generally not possible to force modification of a primary residential loan with a bankruptcy filing, due to special bankruptcy code restrictions on modifying such loans. Second homes, business properties, and mobile homes may fare better. Voluntary modifications can be approved during bankruptcy, although experiences obtaining such a modification vary.

Many factors will influence which strategy is best for any particular homeowner facing mortgage default. For an individualized assessment, please contact our bankruptcy lawyer. If you are early in the process, we can help you learn about your options. If what you tried hasn't worked, we can help you file bankruptcy to stop foreclosure.


Sign Of The Times - Foreclosure by Jeff Turner. Licensed under a Creative Commons License, original at

Photo of Erich M. Fabricius

Raleigh Bankruptcy Attorney Erich Fabricius is available to assist consumers throughout the greater Raleigh area who are filing chapter 13 bankruptcy. Based out of the Knightdale law office of Fabricius & Fabricius PLLC, Erich offers free consultations to consumers who may file bankruptcy.

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This blog post is made available for educational and informational purposes only and to promote a general understanding of the law, and not to provide specific legal advice. Use of this blog does not create an attorney-client relationship. Reading this post is not a substitute for obtaining legal advice based on the unique facts of your situation from an attorney licensed to practice law in your state. No representation is made regarding the currentness of the information contained in this post. Examples that may be provided in this post are merely for illustrative purposes; the results in your case may be different and no results are guaranteed.