How Bankruptcy Can Help With Foreclosure?
Are you falling behind on your mortgage payments? Are you dreading a notification from your lender that might lead to the foreclosure of your home?
When you fall behind the payment of mortgage, the creditors usually send you an advance notice to start the legal process of putting your house for auction to compensate for their loss. However, it doesn’t happen overnight. Typically, your lender will not begin the process until you have missed out on three to four payments. It will give you ample time to try out other viable options that are available to stop foreclosure, for example loan forbearance, short sale, deed in lieu of foreclosure etc. But if you find all these options not working out for you, you can file for bankruptcy to either stop the foreclosure or at least delay the foreclosure and clear you of the debts.
Delaying Foreclosure with the Automatic Stay
• When you file bankruptcy (either Chapter 13 or Chapter 7), the court issues an ‘Order for Relief’. It gives you an “automatic stay” and directs your lenders to immediately stop their attempts to collect the unpaid amount under all circumstances.
• Until the bankruptcy is finalized, the foreclosure sale will be postponed. This process may take up to three to four months.
2 exceptions to this rule are:
Motion to lift the stay: If your creditors file for the motion to lift the stay and are able to achieve the court’s permission to proceed with the auction or the foreclosure sale, filing for bankruptcy will not give you full three to four months. However, it will still succeed to delay the sale by at least two months if not more.
Foreclosure notice already filed: Most states require that lenders should serve an advance notice before holding a foreclosure sale. If you have received a three-month notice of default, and are filing for bankruptcy after two months have passed, this means only one month will be left before your three-month period would lapse. And after this time, the lender can file for motion to lift the stay and seek court’s permission to plan the foreclosure sale.
How Chapter 13 bankruptcy can help you avoid foreclosure
• It allows you to organize a repayment plan so that you can pay off the past due payments, or “arrearage”.
• It allows you to propose the length of time you may need to repay.
• It helps to eliminate payments on second or third mortgages. Chapter 13 entitles the courts to re-categorize second and third mortgages as unsecured debt and as such they don’t need to be paid anymore.
How Chapter 7 bankruptcy can help you
• Chapter 7 bankruptcy will not stop foreclosure but will nevertheless delay the process. It gives you about two or three more months to discuss your options with the lender.
• It helps you to save money as you are entitled to live in your home for free for at least some duration of the time when your bankruptcy is still pending. In some cases, courts will allow you to stay a few more months after the case is closed.
• It cancels all your debt that has been secured by your home. That includes your mortgage, any second mortgages and home equity loans.
• It cancels tax liability for some property loans. You will not face tax liability for losses your mortgage lender faces as a result of your default.
Important Facts to Know before you file for Chapter 7 to stop foreclosure
1. Chapter 7 bankruptcy cannot cancel the foreclosure
When you get into mortgage, you agree to use your home security or a collateral in case you are not able to make the payments in future. Chapter 13 bankruptcy allows you to hold the right of lenders to take the possession of your property and giving you time to catch up on your payments. You can still save your home from foreclosure. But Chapter 7 bankruptcy clears all the debt but it will not lift the lien. Lenders can still schedule the foreclosure sale and you may end up losing your home.
2. You can lose valuable personal property you may want to keep
Courts want the creditors to fully compensate for all the losses they have incurred and as such the bankruptcy trustee may forward the money acquired from selling some of your valuables to the creditors.
3. You may not be eligible
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you are not eligible to file bankruptcy “if your average gross income for the six-month period preceding the bankruptcy filing exceeds the state median income for the same size household”. You are also not eligible if “your current income provides enough excess over your living expenses to fund a considerable Chapter 13 repayment plan”.