How Bankruptcy Can Help With Foreclosure
Posted on December 27th, 2009
Foreclosure document
You can avoid foreclosure completely, or at least delay the process by seeking the protection of the bankruptcy courts. But it shouldn’t be the first thing you do!
Forbearance
You should first attempt to work out an alternative payment plan with your lender before seeking further assistance, but if they will not work with you and you can’t get them to agree to a different plan of action, filing bankruptcy may help. Once you are behind on your house payments, your lender can take the necessary steps to enforce the terms of your loan by selling the house at a sheriff’s sale and recouping some or all of its money from the proceeds of the auction price.
Many people think that missing one payment will cause the lender to foreclose. This is not all the case. Most lenders will try and get you caught up and in fact won’t typically foreclose until the loan is at least 90 days in arrears. When you realize you will have difficulty making your payments, the first thing you should do is call your lender and see if they will help you work something out short of foreclosing on the home. Forbearance agreements at this stage are fairly common, and they generally mean that the lender will stop any accelerated action on the property as long as the terms of the renegotiated contract are met. Perhaps they will allow you to pay your arrearages a little each month, or add the missed payments to the end of your loan.
Short Sale or Deed in Lieu
In more advanced situations, a short sale or deeds in lieu of foreclosure are a couple of alternatives that can be tried. A short sale is selling the house for less than what is owed on the loan, and the lender must approve the sale at the lower price. Though the lender will take a loss, pressing the current debtor will likely involve a bigger loss, and this is seen as the lesser of two evils. Most times, the lender will forgive the additional balance owed by the borrowers.
A deed in lieu of foreclosure is an agreement whereby the borrower voluntarily turns the property over to the lender. The advantage to the borrower is that he is immediately released from most or all of the debt associated with the loan, and offer receives more generous terms than during a formal foreclosure proceeding, and hurts their credit less than a foreclosure will. For the lender, it saves time and costs in repossessing the property.
After these few things have been attempted, and you have failed, bankruptcy is a possibility to consider for avoiding or stalling foreclosure on your house.
The Automatic Stay: Delaying Foreclosure
When a bankruptcy (both chapter 7 and chapter 13) is filed, the court issues an order (this is called an Order for Relief) that has attached an “automatic stay.” This tells your creditors to leave you completely alone, and cease any and all collection activities immediately. If there is a foreclosure sale pending on your house, the sale will legally be postponed while the bankruptcy case grinds through the courts, which typically takes three or four months. The lender can request a “motion to lift the stay” and that might reduce the time of delay, but still should buy a few months.
How Chapter 13 Bankruptcy Can Help
If you are behind on your house payments and have no idea how to possibly get caught up at this point, the only thing you can do to save your house is to file a Chapter 13 bankruptcy.
With a Chapter 13, you will be paying off the “arrearage” (all of the late, unpaid payments, plus fees, etc.) over the length of your proposed repayment plan, which can be as long as five years. But you will need enough money to be able to pay your current mortgage payments plus your monthly Chapter 13 payment. If you successfully complete the Chapter 13 payment plan, things revert to normal and you keep your house.
Often in bankruptcy cases, any 2nd and 3rd mortgages are eliminated because debtors don’t have any equity left with which to secure them. The bankruptcy court will categorize them as unsecured debt, which takes last priority and many times is never paid back at all.
How Chapter 7 Bankruptcy Can Help
You may have to give up your home no matter what you try to do. However, filing for Chapter 7 bankruptcy will still unable you to stall the sale and give an additional two or three more months to work out things with the bank. It can also help you save money and cancel debts, both those secured by your house and others.
While the Chapter 7 bankruptcy is proceeding, you will be living in the house for free, giving you some time to save up enough money to help find a place to live. It will also cancel the debt secured by the house, including any and all mortgages and home equity loans. There is also a new law that states borrowers no longer face tax liability for losses the lender incurs as a result of your default on the loan. In the very worst case, where you lose your home, you will at least be absolved of the debt and tax liability.
Bankruptcy’s Effect on Your Credit Score
Bankruptcy and foreclosure both damage your credit. However, bankruptcy is the better alternative when trying to rebuild credit. Foreclosure does not rid you of your other debt, and is very much frowned on if you’re looking for a new home. Bankruptcy, by contrast, will leave you solvent and debt-free, and you can start to rebuild from that point, instead of buried deep in a pile of debt.
This next article explains if filing for bankruptcy will stop foreclosure on your home.
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