Facing Foreclosure? How Bankruptcy Can Help



It’s not uncommon for many Americans to find themselves falling behind on mortgage payments. You may be able to work out a short sale or loan modification, but most lenders are not extremely flexible. The foreclosure process usually does not begin until the homeowner is two or three months behind on the payments. This allows the homeowner a moment to consider some other options such as a short sale or loan forbearance. If all other alternatives fail, bankruptcy may be the right solution.


Once bankruptcy is filed (either Chapter 13 or Chapter 7) the court automatically issues an Order for Relief. This order grants you what is known as an "automatic stay”; it directs your creditors to immediately cease their collection attempts, even on a mortgage. Most importantly, if a foreclosure sale has been scheduled for your home, it will be postponed, by law, until the bankruptcy is finalized. This can take about three to four months. In the case of a Chapter 13 bankruptcy, the repayment plan lasts between 3 and 5 years. During that time, you will have the ability to catch up the arrearages on your mortgage without the threat of foreclosure.


However, be aware of two exceptions:


  1. The lender can file a motion to lift the stay, which asks permission from the bankruptcy court to continue with the foreclosure sale. If granted, you may not receive the extra three to four months but bankruptcy normally still postpones the sale by about two months or more, if the lender does not act fast in filing the motion to lift the stay.

  2. If the Foreclosure Notice has already been filed? As long as the bankruptcy is filed prior to the foreclosure sale date, the bankruptcy stops the sale. However, if the sale date has already passed, you may not be able to save your home with the bankruptcy process.


How Chapter 13 Bankruptcy Can Help:


You can set up a repayment plan to pay off the past due payments. You can propose the length of time for repayment, but keep in mind that you'll need sufficient income to pay BOTH your past due payments AND your current mortgage at the same time. So long as you make all of the required payments for the length of the repayment plan, you will avoid foreclosure and be able to stay in your home. Note: Chapter 13 can also help eliminate payments on second or third mortgages.


How Chapter 7 Bankruptcy Can Help:


Chapter 7 bankruptcy cancels all the debt secured by the home, including mortgages and home equity loans. Chapter 7 also goes a step further and forgives the homeowner for tax liability for losses the mortgage or home-improvement lender incurs as a result of the homeowner's default. Note: it does NOT cancel the homeowner's tax liability for the lender's losses at foreclosure if the loan was not a mortgage or not used for home improvements (like a loan used to pay for a vacation or automobile). Or, the mortgage or home equity loan is secured by property other than your principal residence (like a vacation home or rental property).

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