Yes, Bankruptcy Might be Able to Save Your Home
Yes, under certain circumstances, filing for bankruptcy can save your home from foreclosure, but read on, there are certain conditions that must be met before you qualify for relief. We’ll do our best to give you a guide to the process here in this post.
Whether you file for chapter 7 or chapter 13, both types of personal bankruptcy will stop foreclosure due to an injunction issued by the bankruptcy court called the automatic stay. Chapter 13 bankruptcy can help you get caught up on past due mortgage payments and even stop foreclosure. Here’s how it works:
Past Due Payments
The all too common scenario unfolds a lot like this: a consumer falls behind on their mortgage and starts to get calls and letters from their lender. They then try to negotiate a modification or payment plan to get caught up. Unfortunately, in most cases the mortgage modification attempt fails after many months of haggling with “loss mitigation” bureaucrats or the bank demanding the arrearages in one lump sum. The consumer can’t afford to come current on their entire past due balance and eventually they lose their home to foreclosure. Chapter 13 bankruptcy changes the playing field by forcing lenders to accept past due mortgage payments in small increments over a period of 3-5 years which gives many families a realistic chance of getting caught up and saving their home. The past due mortgage payments are then added to the existing mortgage payment going forward.
For example, let’s say you’re behind 6 months on your mortgage and your normal monthly payment totals $1,000. The bank asks that you pay the $6,000 in arrearages plus late fees to avoid foreclosure. Unable to come up with the money, you file chapter 13 bankruptcy. Now, rather than being forced to come up with $6,000 all at once, your past due balance is divided over 60 months. $6,000 divided by 60 is $100, so your mortgage payment will now be roughly $1,100. If you can maintain this slightly higher mortgage payment the bank cannot foreclose.
In addition to providing breathing room on past due mortgage payments, filing for bankruptcy temporarily stops foreclosure. In the case of chapter 13, foreclosure will be prevented for as long as you remain current on your mortgage and the chapter 13 payment plan you create with your lawyer. In chapter 7 bankruptcy, foreclosure is only prevented for as long as the case stays open or until your lender makes a motion to have the bankruptcy injunction lifted. In either case, the foreclosure sale is usually stopped for about two to three months.
1. As we’ve mentioned above, you’ll need to be able to make normal monthly mortgage payments in order to keep your home. If this isn’t possible, surrendering the home and walking away might be a better option.
2. Chapter 13 bankruptcy can also help with unsecured debts such as credit cards and medical bills. Depending on your disposable income after expenses each month, you’ll pay a percentage of these debts back to creditors over the life of your payment plan. The rest are forgiven.
3. Chapter 13 carries with it administrative fees. To get started there is a $274 filing fee. In addition, the chapter 13 trustee charges a fee for administering your case and making disbursements to creditors.
4. When you are underwater on a first mortgage, chapter 13 allows debtors to strip second and third liens from a principal residence. The process amounts to forced mortgage modification and can further help reduce the cost of staying in your home. For more information, see: Why Chapter 13 Bankruptcy Has Your Second Mortgage Lender Feeling Undersecured.
If you’re facing foreclosure and could start making normal payments again if your lender would just give you some breathing room, it might not be a bad idea to contact a bankruptcy lawyer for a consultation.
Image credit: Martin Haesemeyer