One of the most common questions people are asking about bankruptcy these days is whether bankruptcy can stop foreclosure. There is no easy answer to that question, and it is something to discuss with your bankruptcy attorney. Here are some considerations in thinking about whether a bankruptcy might stop a foreclosure and save a home.
Saving a Home Using Chapter 7:
According to Morgan & Morgan – Generally, a Chapter 7 bankruptcy will not save a home. Remember that a bankruptcy can end the obligation to pay money, but as a general rule it cannot eliminate a security interest. So, even though the bankruptcy may mean that the mortgage lender cannot come after the debtor to collect money, the creditor still has the right to enforce its security interest. In the case of a Chapter 7 bankruptcy, this means that the lender can still go ahead with the foreclosure action, but it cannot seek any additional money from the debtor, over the amount of money it collects from the sale of the house at the foreclosure sale – that is, the creditor cannot collect a deficiency. The bankruptcy puts a temporary stop to any foreclosure case, but that stop may be very temporary, and the lender can proceed with foreclosure once the discharge is complete or earlier if it has the court’s permission.
On the other hand, it is not impossible for a Chapter 7 bankruptcy to save a home, if a foreclosure has not been filed yet, or was only filed just before the bankruptcy. A homeowner keeps all of his state court foreclosure rights even though he has filed bankruptcy. These include the rights of reinstatement and redemption, very important rights in a foreclosure. If eliminating dischargeable, unsecured debts such as credit card and medical debts will free up enough money for the debtor to make his mortgage payments, then it is possible for the Chapter 7 bankruptcy to result in the homeowner keeping the house.
Saving a Home Using Chapter 13:
If your main reason for filing bankruptcy is to try to save your home, you will need to consider a Chapter 13 bankruptcy. In fact, saving a home is one of the most common reasons to choose Chapter 13 over Chapter 7. This does not mean that it will be easy to save a home using Chapter 13. A Chapter 13 bankruptcy generally will give the debtor time to catch up on debts such as a mortgage loan. This usually means that the monthly payments to the lender will be higher under the Chapter 13 plan than before the bankruptcy, because the monthly payments will include both the current payment and a payment towards the back amount owed (with the back amount paid through the trustee). Also, other priority debts such as child support must also be paid as part of the plan; a person who has a back child support order will need to bring those payments current as part of the plan in addition to bringing the mortgage current. This can be very difficult indeed.
Who is most likely to be able to save a home with a Chapter 13 bankruptcy? If you have been out of work and fallen behind on your mortgage, but you are back at work now, you may be able to catch up on your back payments under a Chapter 13 plan. Since a plan can be as long as 5 years, you will have a significant period of time to catch up on the back payments. Chapter 13 may be a real option to save your home.
It is important to think carefully before filing Chapter 13 bankruptcy. Many Chapter 13 plans fail. If you file Chapter 13 and are unable to complete your plan, you may find yourself in a worse situation than if you had not filed at all. If you are considering filing Chapter 13, talk to your bankruptcy attorney in detail and be realistic about whether you can carry out the plan for three to five years.
-Special Tips from Morgan & Morgan About Loan Modifications in Bankruptcy-
You may have heard of HAMP modifications (Home Affordable Modification Plan) which are one part of the economic recovery plan. The HAMP modification program is available for many mortgages, under guidelines set by the United States Department of the Treasury. In early 2010 the Treasury made an important change to the HAMP guidelines. Under this change, loan servicers who participate in HAMP are required to consider borrowers for a HAMP modification even though the borrower has filed bankruptcy. A HAMP modification together with other bankruptcy protections may make it realistic for a borrower to save a home, even though he would not have been able to save the home with a bankruptcy alone.
If you believe you might be eligible for a HAMP modification, talk to your bankruptcy attorney. You will likely want to work with a knowledgeable HUD certified housing counselor who can assist you with the modification. HUD certified housing counselors do not charge a fee for their services and you should be very wary of any person or business which wants to charge you a fee to assist you with a modification.
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