Foreclosure can be one of the scariest prospects a homeowner can face. The mere possibility can make homeowners look for any way to save their homes. Bankruptcy is often seen as a last resort for people heavily in debt beyond their means, and certain parts of the bankruptcy code can seem like lifelines to homeowners hoping to avoid the painful process of foreclosure. While the purpose of Chapter 7 is to provide a way for people to sell their assets to get out of debt, Chapter 13 bankruptcy is designed as a way to keep your property long-term through a repayment plan. Find out how to use bankruptcy to stop foreclosure in this note.
The first thing to know is that bankruptcy is anything but a quick fix. It’s a serious process filled with legal requirements and eligibility rules, long-term consequences for credit profiles, and potential multi-year commitments to pay off debts that fall under filing. If you are thinking of filing for bankruptcy to keep your home, you should have a clear idea of what you are getting into before you file. For any questions you may have, contact Bankruptcy Now for more information.
How to use bankruptcy to stop foreclosure in Chapter 13
Chapter 13, commonly known as the “earner’s plan,” can be a good option for people who are under a mountain of debt, but still have a steady income. Unlike Chapter 7 bankruptcy, in which eligible assets can be sold to pay off debt, Chapter 13 allows debtors to propose a repayment schedule—typically three to five years—depending on income level. . If debtors follow the plan and all conditions are met, they receive a discharge of the debts included in the plan. More importantly, a Chapter 13 bankruptcy can also help in how to use bankruptcy to stop foreclosure.
The repayment plan can incorporate missed mortgage payments, allowing homeowners to catch up with their lender. However, the plan does not release the borrower from the established mortgage payment schedule: the borrower must continue to make those monthly payments during the amortization schedule.
The “automatic stay” provision of bankruptcy
Regardless of your ability to obtain a discharge through Chapter 13 bankruptcy, filing stops the foreclosure process through the “automatic stay” provision. This protection generally allows the debtor a break from the persistent communication and collection efforts of most creditors, including mortgage lenders. The foreclosure process will not stop completely, but the automatic stay will create a little respite until a repayment plan is scheduled and accepted by the court.
The automatic stay is an aid in using bankruptcy to stop foreclosure, but it is not a guarantee to keep the home. First, you cannot undo parts of the foreclosure process that have already been completed. If the mortgage lender has completed the foreclosure sale prior to the bankruptcy filing, then the home can still go to the foreclosure auction. The automatic stay also does not protect you from the consequences of missing new mortgage payments during the Chapter 13 amortization period. If those payments are not made, the lender can file for foreclosure.
How to use bankruptcy to stop foreclosure with automatic stay in Chapter 7
The automatic stay may also provide some relief in a Chapter 7 bankruptcy, although it may not allow you to stay in your home after the bankruptcy. In Chapter 7, the debtor’s eligible assets are sold to pay creditors. A home is likely to be included in that sale if its value is sufficient to cover eligible debts, but the automatic stay could provide an opportunity to remain in your home until then.
The long-term effects of Chapter 13 bankruptcy on credit
Although these Chapter 13 Bankruptcy provisions can help you use bankruptcy to stop foreclosure, they are by no means a simple solution to the problem. Any bankruptcy carries significant risks and long-term consequences. Even a successful bankruptcy will have lingering effects. One of the most measurable and immediate effects to consider is what bankruptcy does to credit scores. In most cases, a Chapter 13 bankruptcy stays on your credit reports for seven years (three years less than a Chapter 7 bankruptcy) and is considered an especially negative event by most credit scoring models.
Ultimately, lenders will look at more than scores when approving a potential borrower, but a major negative mark, such as bankruptcy, can affect your ability to get new credit cards and loans. That includes any mortgages (including refinances) that you expect to get in the future. Lenders may be hesitant to approve large, long-term loans and may choose to decline such applications. Even if the application is approved, you can expect the loan to have a very high interest rate and require a higher down payment and closing costs than it otherwise would have. With a bankruptcy on your record, you are more likely to be identified as a subprime borrower.
Conclusion
To make the best decision, it’s probably worth considering how important it is to you to keep your home. Neither foreclosure nor bankruptcy is a great option, but the best alternative for you may depend on your ultimate goal. If you can’t imagine leaving your home, then your options may be limited. But the willingness to live elsewhere could open up a few other avenues, including filing a Chapter 7 bankruptcy or accepting foreclosure.
Both the effects and the value of a bankruptcy or foreclosure depend largely on individual circumstances, so it is recommended that you seek expert advice before making any decision about the best path for you. A Miami Bankruptcy Attorney Michael Brooks will be able to assess your particular situation and offer you the best alternative on how to use bankruptcy to stop foreclosure.
