Many Americans fall behind on their mortgage payments. Sometimes, lenders and mortgage companies are willing to work out deals with homeowners, but other times, this isn't the case. In this situation, a lender will likely start the foreclosure process, which involves the creditor repossessing and selling the house at a public auction.
If you've fallen behind on your mortgage payments and are facing foreclosure, you may be worried that there are no other options out there for you. However, in some cases, bankruptcy may be able to help. Filing for bankruptcy allows you to keep your home while paying back past-due debt. Here's how filing for bankruptcy can help if you're facing foreclosure on your home.
How the Automatic Stay Can Delay Bankruptcy
The moment you file for bankruptcy, the court automatically issues an order known as the automatic stay. The automatic stay is a preliminary injunction that immediately stops most lawsuits filed against you and protects your money and property from creditors. If your home is scheduled for a foreclosure sale, the automatic stay will postpone the sale while your bankruptcy is pending – typically about three to four months.
There are two exceptions to this rule:
- A motion to lift the automatic stay: The lender can file a motion to lift the automatic stay, which asks permission from the bankruptcy court to continue with the foreclosure sale. If it's granted, you may not get the extra three to four months. However, bankruptcy will normally postpone the sale by two months or more.
- If the foreclosure notice has already been filed: Many states have laws that require lenders to give homeowners a certain amount of notice before selling their property. The automatic stay from bankruptcy will not stop the clock on this advance notice.
Chapter 13 bankruptcy and foreclosure
Chapter 13 bankruptcy is considered a reorganization bankruptcy because it allows you to set up a repayment plan to pay off your debt. Chapter 13 is designed for debtors with a steady income that can pay back at least a portion of their debts through a repayment plan. If you make too much money to file for Chapter 7, you'll likely qualify for Chapter 13.
In Chapter 13 bankruptcy, you get to keep all of your property, including non-exempt assets. This is a good thing for people who are facing foreclosure. However, you'll need enough income to make your current mortgage payment at the same time that you're paying off your past-due debt. As long as you have the money to make both payments, Chapter 13 bankruptcy will help you avoid foreclosing on your home.
Chapter 13 may also be able to help you eliminate payments on second or third mortgages. In most cases, Chapter 13 allows the bankruptcy court to re-categorize second and third mortgages as unsecured debt. In Chapter 13, unsecured debt takes the last priority and usually doesn't have to be paid back. An experienced bankruptcy attorney will be able to advise you as to whether Chapter 13 can help you eliminate your second or third mortgage.
Chapter 7 Bankruptcy and Foreclosure
When you bought your home, you signed two important documents – a promissory note to repay the mortgage loan and a security agreement that could be recorded as a lien to enforce performance on the promissory note. While Chapter 7 will get rid of your personal liability under the promissory note, it doesn't remove the lien. This means that you may still have to give up your house under the lien since that's what provided collateral for the loan.
It's also important to note that you may lose other valuables when you file for Chapter 7. The bankruptcy court typically wants to make your creditors "whole" again from their loss, and they may award money from the sale of certain valuables to your creditors.
If you're facing foreclosure and are wondering whether bankruptcy can help, the best thing you can do is to meet with an experienced bankruptcy attorney. They'll be able to look over your case for you and help you determine whether bankruptcy is right for you.