The Short Answer
Forced-placed insurance is coverage a mortgage company purchases on your behalf when your homeowner's insurance lapses — typically because you've fallen behind on mortgage payments and the escrow account is no longer being funded. The mortgage company does this to protect its interest in the property, but the cost is passed directly to you. This matters in Chapter 13 bankruptcy because those insurance charges get added to your mortgage arrears, which can drive up your monthly plan payment. You can reduce that cost by obtaining your own homeowner's insurance and notifying your mortgage company to cancel the forced-placed policy.
If you are behind on your house payments and are considering filing Chapter 13 bankruptcy to save your home, it is important that you find out whether you have forced placed insurance.
Your bankruptcy attorney may ask you whether your homeowner’s insurance payments are usually included in your mortgage payments (in other words, whether your insurance is escrowed). If your answer to that question is yes, but you are several months behind on your mortgage payments, there are further steps you need to take.
When you fall behind on mortgage payments, the mortgage company is no longer receiving money from you each month to make your homeowner’s insurance payment on your behalf. Therefore, the homeowner’s insurance may lapse due to non-payment. The mortgage company cannot have the liability of a house with no insurance coverage, so the mortgage company will pay for insurance on your behalf. This is called forced-placed insurance because the mortgage company is essentially forcing it onto your home since there is no other insurance coverage on your home.
Why should you be concerned about forced placed insurance? The reason is that this insurance is generally much more expensive than the insurance you could find and pay for on your own. When your Chapter 13 bankruptcy is filed, the mortgage company will add the forced placed insurance costs onto the amount you are behind on payments. In the end, this could cause your Chapter 13 plan payment to be higher than necessary.
If you contact your mortgage company and find out there is forced-placed insurance on your property, speak with your Chapter 13 bankruptcy attorney about your options. He or she may recommend that you obtain your own property insurance that you will pay for out of pocket. Your attorney will also remind you to notify the mortgage company with proof of the new coverage when it has been obtained, so the forced-placed insurance can be canceled.
Key Takeaways
- Forced-placed insurance is triggered when your homeowner's insurance lapses after falling behind on escrowed mortgage payments.
- Mortgage companies purchase this coverage to protect their interest in the property, not yours — and it is almost always more expensive than a policy you would buy yourself.
- In a Chapter 13 bankruptcy, the cost of forced-placed insurance is added to your mortgage arrears, which increases the total amount your plan must repay.
- You can cancel forced-placed insurance by obtaining your own homeowner's policy and providing proof of coverage to your mortgage company.
- Before your Chapter 13 case is filed, ask your attorney whether forced-placed insurance appears on your mortgage account so you can address it before the arrearage is locked into your plan.
- Acting before you file — not after — gives you the best chance to keep your Chapter 13 plan payment as low as possible.
Attorney Insight
The mistake I see most often is clients coming in with forced-placed insurance already on their account and no idea it's there — they've been focused on the missed payments, not the insurance line item buried in their mortgage statement. By the time we file, that forced-placed premium has been stacking up for months, and it gets folded into the arrearage we have to cure through the Chapter 13 plan. That makes an already tight plan payment even harder to sustain over 36 to 60 months. A quick call to the mortgage servicer before we file — and a same-day homeowner's policy if needed — can save clients real money every month for the life of their plan.
