Bankruptcy and Foreclosure

Many people fall behind on their mortgages. While some lenders are more than willing to work with homeowners who get behind on their payments, this is the exception rather than the rule. If you fall too far behind on your payments, your mortgage lender will likely begin the foreclosure process. One saving grace for homeowners facing foreclosure is that the process usually takes a while.This gives them time to consider alternatives to foreclosure, such as loan forbearance, a short sale, a deed in lieu of foreclosure, or bankruptcy.

An experienced bankruptcy attorney will evaluate your situation and advise you whether filing for bankruptcy could help if you are facing foreclosure. If you are in Arizona, Colorado, or Nevada and would like to discuss how bankruptcy may assist you, please do not hesitate to call our office for a fresh start today.

What is Foreclosure?

Foreclosure is the process by which a mortgage lender sells the homeowner’s house in order to cover the outstanding debts the homeowner owes to the mortgage lender. This process typically begins several months after the homeowner falls behind on his or her mortgage payments. In most cases, when a lender wants to begin the foreclosure process, they record a public notice with the county recorder’s office indicating that the borrower has defaulted on the mortgage, and also alert the borrower that they are in danger of foreclosure. After this notice phase, the borrower enters into grace period during (usually 30 to 120 days) in which they can work out an arrangement with the lender to pay off the debt they owe. If the default is not remedied by the end of the grace period, the lender will then arrange for the home to be sold at auction where the home will be sold to the highest bidder.

The Automatic Stay in Your Bankruptcy Case

If you decide to file for bankruptcy before the completion of the foreclosure process, the court will automatically issue an order called an “automatic stay,” which directs your creditors to cease their collection activities immediately. If your lender had scheduled your home for a foreclosure sale, and you file for Chapter 7 bankruptcy, the sale will be legally postponed (usually by about three to four months) while the bankruptcy is pending. In some cases, the lender can request that the court lift the automatic stay so that the foreclosure process can proceed. If this is granted, you may not receive the extra three to four months of time.However, even if the lender’s request is granted, it will take the court a month or two to consider it, which can buy you more time in which to avoid the foreclosure.

You should also be aware that the automatic stay works differently if you file for bankruptcy after your lender has already filed the foreclosure notice. Most states have laws that require lenders to give homeowners a certain amount of notice before selling their property, and an automatic stay will not stop the clock on this advance notice. For example, assume that you live in a state where the law requires a lender to give the homeowner at least three months notice before selling the home. If you receive this three-month notice and then file for bankruptcy two months later, the three month period would have passed after being in bankruptcy for only one month. As a result, the lender could file a motion to lift the stay and ask the court’s permission to schedule the foreclosure.

How Chapter 13 Can Help

Chapter 13 bankruptcy allows you to set up a repayment plan to pay off the past due payments on your mortgage. You can propose the length of time for repayment, but keep in mind that you’ll need sufficient income to pay both your past due payments and your current mortgage payments at the same time. So long as you make all of the required payments for the length of the repayment plan, you will avoid foreclosure and be able to stay in your home.

Chapter 13 bankruptcy can also help you eliminate additional mortgage payments if you have multiple mortgages on your home. If your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value), you might no longer have any equity with which to secure the later mortgages. That allows the Chapter 13 court to recategorize the second or third mortgage as unsecured debt, which, under Chapter 13 bankruptcy, takes the lowest priority and often does not have to be paid back at all.

How Chapter 7 Can Help

Chapter 7 bankruptcy also cancels all the debt secured by the home, including mortgages and home equity loans.However, Chapter 7 will not keep you from losing your home. Chapter 7 forgives your debt, but that is it. When you enter into a mortgage, you are agreeing to use your home as collateral if you default on your payments. Chapter 13 enables you to pause action on that lien while you catch up on your payments and gives you a chance to save your home. Chapter 7 forgives your debt, but it will not lift the lien, and hence will not lift the foreclosure on your home.

If you choose to file for Chapter 7 bankruptcy when facing a foreclosure, you could also lose other valuables. Because the courts generally want to reimburse creditors for their losses, the bankruptcy trustee may award money from the sale of certain other valuables of yours to the creditors. For example, if you have a valuable wedding ring that has value exceeding the dollar amount you are allowed to keep during bankruptcy, under the “jewelry exemption”, you could lose your wedding ring. Therefore, Chapter 13 bankruptcy will be the better option for most homeowners facing foreclosure.

Contact a Skilled Bankruptcy Attorney Today for More Information

You don’t have to go through a foreclosure alone. If you are facing foreclosure and are considering filing for bankruptcy as a strategy to keep your house, contacting a bankruptcy attorney would be a good way to make healthy, informed decisions about doing so. Contact the office of Want a Fresh Start today online or call 866-780-4855 to schedule a free consultation.