Chapter 13 Bankruptcy & Mortgage Foreclosure
Mortgage companies continue to foreclose on American homes at an alarming rate. The real estate market boomed in the late 1990's and early 2000's. Property values soared and homeowners cashed in on their new found home equity. However, interest rates have climbed, the real estate market has cooled and homeowners realize it's a buyer's market. Some homes will sit on the market for six, nine or twelve months. The asking price goes down and homeowners inch closer to the edge of foreclosure.
Many consumers do not understand that the bankruptcy code can help them save their homes from mortgage foreclosure. Chapter 13 bankruptcy is a very powerful tool that can save your home if you have fallen behind on your mortgage payments and you want to rescue your home from mortgage foreclosure.
What is a Mortgage Foreclosure:
Foreclosure is the legal proceeding in which a bank or mortgage company takes title to real estate due to the homeowner's failure to make the agreed mortgage payments.
The downward spiral into foreclosure begins when your loan payment becomes 16 days overdue. At that point, your mortgage lender may try to contact you to work out a repayment schedule to bring your loan current. If your payments fall 90 days behind, the mortgage company will likely refer your mortgage to an attorney that will start formal foreclosure proceedings.
Chapter 13 Bankruptcy Stops Foreclosure:
Chapter 13 bankruptcy is designed to stop foreclosure. In fact, stopping mortgage foreclosures is the driving force behind many Chapter 13 bankruptcies. As soon as you file Chapter 13 bankruptcy an "automatic stay" goes into effect. This "stay" stops your mortgage company from continuing to foreclose on your home. Your mortgage company cannot contact you in regard to your pre-filing mortgage arrears (the amount you are behind on the mortgage) while you are in the Chapter 13 bankruptcy.
How Does Chapter 13 Bankruptcy Work:
Once you prepare a Chapter 13 plan with your attorney, you will file a Chapter 13 petition for relief and the foreclosure proceeding will stop. The bankruptcy trustee will then recommend your Chapter 13 plan for confirmation and the bankruptcy court will approve a repayment plan that allows you to get current on your mortgage over a three to five year period. You must make all current mortgage payments that come due after the Chapter 13 bankruptcy petition is filed.
Homeowners must make all mortgage payments that come due during the Chapter 13 plan. If you fail to make your post-filing mortgage payments the mortgage company can ask the bankruptcy court to lift the protection of the automatic stay and the mortgage company can resume the foreclosure proceeding if the judge agrees with the mortgage company. The possibility of refinancing your mortgage after you have gotten back on track with your Chapter 13 plan is a real possibility for many consumers
When Should You File Chapter 13 Bankruptcy to Stop a Mortgage Foreclosure:
Generally, the Chapter 13 bankruptcy must be filed before the mortgage company sells your home. However, if you find yourself behind on your mortgage payments you ought to call an experienced attorney to explore all of your options before the situation spins out of control. The Chapter 13 bankruptcy filing gives homeowners the time they need to catch up on their mortgage payments.
Who Can File Chapter 13 Bankruptcy:
You can file a chapter 13 bankruptcy to stop a mortgage foreclosure, provided you:
- Are employed or have a steady source of income;
- Have enough income to make your Chapter 13 plan payments, and your current mortgage payments after the chapter 13 is filed.
Chapter 13 plan payments are fixed so that you can meet all your living expenses first and then pay any surplus income to creditors.
Chapter 7 and Mortgage Foreclosure
Chapter 7 bankruptcy is a liquidation bankruptcy. A Chapter 7 will typically eliminate:
- credit card debt;
- installment loans;
- pay day loans;
- medical bills, and most other unsecured debt.
In most cases consumers will keep all of their property. If you are facing foreclosure on your home, the automatic stay created by your Chapter 7 filing serves as a temporary defense against foreclosure. As opposed to Chapter 13 bankruptcy, Chapter 7 will give you a fresh start, but will not provide you with the opportunity to catch up with your mortgage payments.
However, Chapter 7 bankruptcy will allow you to discharge, or eliminate, any deficiency balance owed to your mortgage company if your home is sold for less than the outstanding balance owed to the mortgage company.
The Difference Between Chapter 13 and Chapter 7 Bankruptcy?
The biggest difference is that a Chapter 7 bankruptcy does not provide for the repayment of any debt. Chapter 7 cannot stop a mortgage company from foreclosing on property. Chapter 7 will temporarily delay the foreclosure proceeding, but it cannot provide the long-term protection of Chapter 13 because no plan to repay the mortgage delinquency is proposed.
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