The Truth about Foreclosure and Bankruptcy

More than 2.3 million American homeowners faced foreclosure in 2008, an 81 percent increase from 2007. Today's economy has placed many otherwise fiscally responsible individuals into a position in which they have fallen behind on their mortgage payments. Job loss, the death of a spouse, medical issues, and other catastrophic financial issues can all have a negative effect on an individual's ability to make his or her mortgage payments on time. Although many people experience only temporary problems paying their mortgage and/or other bills and get back on track in a few months, other people fall so far behind that they are in danger of losing their homes. Most mortgage lenders will not take any significant negative action until payments have fallen three or more months behind, but at that point they might initiate action to take possession of the home and sell it at auction to recoup as much of their losses on the loan as possible. After the property has been sold, the former homeowner is still responsible for the difference between the total amount owed on the loan and the amount that the house sold for at auction. This can leave homeowners with a mountain of debt but no home to show for it.

If you are falling behind, the first course of action is always to contact the mortgage lender as soon as possible to work out a plan to get back on track. However, if that is no longer possible, you might want to take steps to protect your home from foreclosure. One of these steps might mean filing for bankruptcy protection in a federal bankruptcy court.

 

The Choice to File Bankruptcy

Foreclosure is never a nice thing to have to face; however, with the knowledge of what you need to do and can do, you can work hard to ensure you do what is right for your family. Whether you choose to fight and keep your home or let it go, bankruptcy can help you get back on track financially for the next time you have a mortgage.

 

Stopping Foreclosure: The Order of Relief

Although the preferred way to stop foreclosure is to catch up on late payments, doing this is not always possible. However, you still have options available that will stop foreclosure proceedings, if only temporarily.

Once you file a bankruptcy petition, the bankruptcy court issues what is called an order of relief. This order, also known as an automatic stay, stops creditors, including mortgage lenders, from further action for a period of about three to four months. In many instances, there are actions that a mortgage lender can take to proceed with the foreclosure by lifting the stay, but this takes time. Under most circumstances, no matter where you are in the foreclosure process, filing for bankruptcy can delay the sale of your home by two to three months or more.

 

Chapter 13 Bankruptcy and Foreclosure

The type of bankruptcy relief you might seek depends on the desired result. Filing Chapter 13 bankruptcy will allow you to remain in the home and catch up on back mortgage payments. To qualify for Chapter 13, you must prove that you earn sufficient income to enter into a solid repayment plan while making current mortgage payments. In essence, you will have to pay your current monthly payment in addition to a portion of the past due balance every month during Chapter 13 bankruptcy. Depending on your financial situation, second- or third-mortgage balances might not have to be repaid at all.

If you have a secured debt that you are paying on throughout Chapter 13 bankruptcy, you can typically get modifications made to the loan, such as lower interest and different payment terms, to make it easier and more reasonable to pay off. However, this does not apply to home mortgages. If you are unlucky enough to be facing foreclosure because you cannot afford the payments on your home, Chapter 13 may not be the best route for you because you will still be stuck with the same payments and terms.

 

Chapter 7 Bankruptcy and Foreclosure

Chapter 7 bankruptcy is an option for you if you realize you will not be able to repay your past due mortgage payments but you do not want to be saddled with the debt that remains after the sale of your home. There are also currently tax relief options that help individuals facing foreclosure avoid liability. However, bankruptcy and tax laws are complicated. If you are facing foreclosure, seek the advice of a qualified bankruptcy attorney to help you navigate the process of avoiding foreclosure or filing bankruptcy to avoid losing a home.