Foreclosure and Bankruptcy

Foreclosure and bankruptcy seem like a lethal combination, but if you've already exhausted all other options to stop foreclosure, it may be time to consider bankruptcy.

You have the right to seek protection from your creditors, including your mortgage lender, by filing bankruptcy.  This will help you avoid or delay foreclosure.  

Here are some ways to work with foreclosure and bankruptcy.

Bankruptcy as a Way to Delay or Stop Foreclosure:

Automatic Stay 

Once you file either a Chapter 7 or Chapter 13 bankruptcy, the court immediately issues an Order of Relief.  Such an order includes an "automatic stay", which immediately stops your creditors from commencing or continuing any and all collection activities.  Since your mortgage lender is considered one of your creditors, a foreclosure is immediately stopped and postponed while the bankruptcy is pending.  The only way for your lender to continue foreclosure proceedings is if they file a motion for a "relief from stay".

IMPORTANT:  Filing the bankruptcy will also buy you some time if you need it to close a refinance or a sale of your property that will either payoff your existing mortgage loan or reinstate it by paying the delinquent amount and bringing your loan current with a new 2nd mortgage.  In fact many homeowners use this strategy to buy at least 30-60 days.   In a Chapter 13, you can have the bankruptcy dismissed literally right before a new loan or a sale of the property closes escrow ---thus avoiding foreclosure.  

The bankruptcy will be reported on your credit report even if it was quickly dismissed, but since your credit is already tarnished by this point, it might be worth it to file in order to avoid foreclosure and save whatever equity you may have.

Motion for a Relief from Stay 

This is a motion that your lender may file to obtain permission to "lift" the automatic stay so that they can proceed with the foreclosure.  If the bankruptcy court grants your lender this request, the foreclosure will unfortunately continue.  The likelihood that the court will grant your lender a relief from stay will depend on how strong their argument is with regard to your inability to pay or your poor past performance.  

IMPORTANT: If you are trying to refinance, reinstate, or sell your property, you must try to close either transaction before a relief from stay is approved by the bankruptcy court.  With a relief from stay, your lender will be able to resume the foreclosure and depending on how much time you have left in the foreclosure process, your lender may be able to foreclose before you can close on a refinance or a sale of your property.  It would be extremely helpful to consult with an experienced bankruptcy attorney to help you with this situation.

Foreclosure and Bankruptcy Chapter 13

If you are behind on your payments and have no way of bringing your loan current , filing a BK Chapter 13 will allow you to repay your late payments over a scheduled repayment plan that can span over 3-5 years.  The only catch is that you will need to have enough monthly income to pay your current mortgage payments plus the incremental payments to pay off your arrearage (late payments).  

In order to avoid foreclosure, you will have to make all the required payments stipulated in your repayment plan.  If you fail in making your scheduled payments, the court has the ability to dismiss your bankruptcy, allowing your creditors to resume collecting on your debts.

Junior liens (2nd and 3rd mortgage loans) - Your 2nd or 3rd mortage loan payments may be eliminated in a BK Chapter 13.  This is possible only if the value of your property is only equal to or less than your 1st mortgage loan.  This is true in cases where property values have dropped so much that there is zero or negative equity left.  This means the value of the property can only secure the 1st mortgage, leaving any subsequent mortgages "unsecured".  

The above situation allows the bankruptcy court to "strip off" any junior liens that are behind the 1st mortgage and recategorize them as "unsecured debt".    This is helpful to you because unsecured debt is deemed last priority and will more than likely not have to be paid.

Learn more about Chapter 13 Bankruptcy Laws.

Foreclosure and Bankruptcy Chapter 7

BK Chapter 7 is the most popular for eliminating debts.  The only drawback during a foreclosure and Bankruptcy Chapter 7 is that Chapter 7 lasts for only four months.  Foreclosure can resume right after the four months.  Unfortunately,  if your lender is successful in convincing the bankruptcy court  grant permission to continue the foreclosure while your bankruptcy is pending, you'll have much less time.

It is important to keep in mind that Chapter 7 will only delay foreclosure.  It will not stop it as an ultimate result.  On the bright side, you are able to live in your property, for free, while your Chapter 7 is in process.  You can save enough money for your next living arrangements.  

Another huge advantage of BK Chapter 7 is the elimination of unsecured debt such as credit card debt and medical bills.  It will also get rid of your mortgage debt with no tax liability for your lender's loss, which you would otherwise be liable to the IRS if you did not file bankruptcy or cannot prove yourself to be insolvent at the time of the foreclosure.  

Although a Chapter 7 is a popular choice, it is now a bit tougher to file since the changes in Chapter 7 Bankruptcy Laws in 2005.  

Filers must now pass a Bankruptcy Chapter 7 Means Test to qualify.  

If you are in foreclosure and bankruptcy is something you are seriously considering, make sure you seek the advice of a qualified and experienced attorney who can guide you in the right direction.

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