Home is where the heart is. Your home is not only your most important financial asset, but it is your sanctuary, your refuge from the craziness of the outside world. I would give up my car and eat Ramen noodles if it meant I could stay in my home. But what if you’re facing bank foreclosure? No one ever wants to file for bankruptcy. But if you are more than three months behind on your mortgage payments, filing for bankruptcy before foreclosure begins is the best way to protect your home from being seized.
If you’re already behind on your mortgage payments, your lender is unlikely to work with you to renegotiate the terms. When the bank begins foreclosure proceedings, they will want the entire mortgage amount, and if you can’t pay it, you will lose your home. However, filing bankruptcy before the foreclosure sale of your home triggers an “automatic stay,” which prevents creditors from taking collection action against you, including foreclosure.
You can remain in your home. Once you engage an attorney, your creditors can’t demand money from you until your case is discharged. Creditors do have the option of attempting to get the stay lifted, but this process is uncertain and usually takes two to three months. Most bankruptcy cases are discharged within one to three months, before the foreclosure sale of your home can be completed.
Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 bankruptcy means that all of your debts (with some exceptions, like student loans) are discharged, or forgiven. You get a clean slate. But that also means giving up your home and losing all your equity. Chapter 7 releases you from your obligation to repay, but the bank still retains their lien (ownership) of your home.
With Chapter 13 bankruptcy, however, you can re-organize your debts and spread them out over three to five years. This includes working out new terms with your mortgage lender. You’ll need to keep up on the new payments, but you’ll get to keep your home. Another advantage of Chapter 13 bankruptcy comes into play if you also have a second or third mortgage or a home equity line of credit (HELOC).
Let’s say your home has an appraised value of $150,000, and that your first mortgage’s owed balance is more than $150,000 (commonly called being upside-down or under water). This means that your second and third mortgages or HELOC are unsecured by any actual real estate value. Because they can be considered unsecured debt, a Chapter 13 plan can strip them off using the bankruptcy code’s sections 1322(b)(2) and 506(a).
Because so many homes in the past five years have lost upwards of half their value in the recession, the use of Chapter 13 bankruptcy to strip off additional liens has become an important tool for debtors.
Disclaimer: This is not meant to serve as legal advice. You must consult an attorney for proper legal advice.
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