If you are facing foreclosure, you may have tried a variety of strategies that could allow you to stay in your home, such as a workout with your mortgage company, or even a federal program such as the Home Affordable Modification Program. But nothing has helped and you are falling further behind in your mortgage payments. Can declaring bankruptcy be the answer? Can bankruptcy stop foreclosure and allow you to keep your primary residence?
Chapter 13 Bankruptcy
Bankruptcy is a federal court process providing individuals or businesses the opportunity to either eliminate their debts or repay them. There are two most common types of bankruptcy. Under a Chapter 7 bankruptcy, the bankruptcy court wipes out or discharges the debts you owe, but you will probably lose your house. Under a Chapter 13 bankruptcy, you can usually keep some of your property, including your primary residence, but you are required to follow a payment plan to repay at least part of your debts to your creditors.
Chapter 13 bankruptcy can give you the opportunity to rearrange your financial affairs, start paying off your debts, and bankruptcy can forestall foreclosure of your home. The bankruptcy petition must be filed before the sale date of your property, and you must create a plan to make your mortgage payments. Under the operation of law, if you can pay your regular mortgage payments they must be accepted by your mortgage company.
Chapter 13 stops the house foreclosure process; it stops interest accruing on personal debt, including most back taxes; and through something called the “automatic stay” it stops all collection activity. Under a court approved Chapter 13 plan, you are required to make monthly payments to a court appointed bankruptcy trustee for a period of three to five years. The bankruptcy trustee is responsible for paying the money to your creditors.
Is Bankruptcy Easy? No!
The legal system is complex, and your creditors will have aggressive legal counsel to challenge you at every stage of the process. You need qualified legal counsel to guide you through the procedure.
Can bankruptcy stop a foreclosure? It can at least delay it. Your home is probably secured by a deed of trust, and your mortgage company is entitled to petition the court for relief from the automatic stay. To keep your home you will have to make an agreement with your mortgage company to repay the past due amount. The question you need to ask yourself—and answer to the satisfaction of the court and your mortgage company—is if you could not pay your mortgage last month, how can you expect to pay your mortgage next month?
You may have heard of the “homestead exemption” that allows you to keep your house. According to federal law, protection for a homestead is limited to $125,000 if the property was acquired within the previous 1,215 days (3.3 years). Restrictions are complex and vary by state; this is another good reason to consult a qualified attorney.
Chapter 13 bankruptcy may buy you some time but you will not automatically get to keep your home. You will have to negotiate with your mortgage holder.
Consider the advantages of filing bankruptcy in order to keep your home:
• Foreclosure proceedings are temporarily suspended.
Consider the disadvantages of filing bankruptcy solely to stop foreclosure:
• For ten years there will be a bankruptcy on your credit record.
• Your mortgage company can petition the court and still foreclose.
• You will lose your negotiating position.
• You will still have to repay past due amounts to your mortgage company.
• You need to make every payment to the court appointed trustee. If you are even one day late your case may be dismissed and your mortgage company may foreclose.
Before you consider filing Chapter 13 bankruptcy in order to save your home, think carefully about the alternatives (including selling your home) and get good legal advice.
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