If you’re facing the loss of your home to foreclosure, bankruptcy is probably the furthest thing from your mind. Many homeowners facing foreclosure become hyper-focused on saving their homes and understandably overlook broader solutions. Here are four ways that filing for bankruptcy may help homeowners facing foreclosure.
Foreclosure and the Automatic Stay
The automatic stay that is entered immediately when most consumer bankruptcy cases are filed brings an immediate stop to all collection actions, including foreclosure. If your home has been scheduled for sale or a judicial foreclosure proceeding is underway, filing for bankruptcy protection can temporarily stop the action while you and your attorney consider your options and perhaps negotiate with the mortgage holder.
The mortgage holder may file a Motion for Relief from Stay, which may mean that the delay is brief. But, the break and the procedural requirements imposed on the lender can provide both an opportunity to pursue other solutions and an incentive for the mortgage holder to negotiate.
Chapter 13 Bankruptcy
For homeowners who have the resources to make regular payments moving forward but have fallen too far behind to get back on track, a Chapter 13 bankruptcy repayment plan may be the answer. Chapter 13 bankruptcy allows people with regular income to restructure past-due debt over three to five years.
Chapter 13 won’t be a workable solution for homeowners who are unable to make their regular monthly mortgage payments. However, those whose finances have stabilized but who are facing large past-due balances may be able to spread the delinquent payments over 36 to 60 months while making current payments on time. So long as plan payments and regular monthly payments are made on schedule, the lender will not be able to foreclose.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy doesn’t provide a direct solution to mortgage foreclosure. Mortgage debt is secured debt, and can’t be discharged in bankruptcy if the debtor keeps the house. However, when the homeowner has regular income but there isn’t enough to go around, Chapter 7 bankruptcy may free up other money to put toward the mortgage payment.
In a Chapter 7 case, it is usually possible to discharge (legally eliminate) most unsecured debt, including medical bills, unsecured loans, credit card debt, past-due utility bills and payday loans. For some homeowners, clearing the other debt they’ve been juggling will free up enough income to create a workable plan with the mortgage lender.
Bankruptcy and Deficiency Judgments
In most residential foreclosure cases in California, the lender is legally prohibited from pursuing a deficiency judgment if proceeds from the sale of the home fall short of the outstanding balance on the loan. However, there are exceptions, including some judicial foreclosures and outstanding balances on non-primary loans such as Home Equity Lines of Credit (HELOCs).
Many of those who find themselves facing a deficiency balance after foreclosure can discharge that balance in Chapter 7 bankruptcy, wiping the slate clean and moving forward after foreclosure without lingering obligations.
Bankruptcy and Foreclosure
Whether or not bankruptcy may be an effective tool in avoiding foreclosure or resolving a foreclosure case depends on a variety of factors. Some of the key factors include the amount of equity in the house, the past-due balance on the mortgage loan, the amount of regular income the homeowner has and the other debt in the mix.
The best way to determine whether Chapter 13 bankruptcy could save your home or a Chapter 7 case could provide the relief you need from other debt is to talk to a local bankruptcy attorney.