Using bankruptcy to fight back against foreclosure

If you are facing foreclosure, the thought of losing your house is a frightening one. Although much is at stake, it is important to keep a clear head and consider your options. Although it may seem hopeless, foreclosure is often avoidable by filing bankruptcy. Both Chapter 7 and Chapter 13 bankruptcy can help, but one may be better than the other, depending on your situation.

How Chapter 7 can help

Once you file bankruptcy, the automatic stay becomes effective. Once in effect, the stay stops creditors, including your mortgage lender, from continuing to collect debts. In other words, it immediately stops the pending foreclosure against you. In Chapter 7, this protection is temporary, as your lender may eventually ask the court to allow it to restart foreclosure proceedings, if you have not brought your mortgage current within a couple of months after filing.

Because of this fact, Chapter 7 would be ideal for you if you cannot afford your mortgage payments and would like to surrender your home back to your lender. Chapter 7 can help because it can prevent you from being liable for a deficiency judgment, if your lender later sells your home for less than the remaining balance of the mortgage.

Chapter 7 can also be helpful if you are behind on your mortgage because of other bills and financial obligations. Since Chapter 7 can quickly discharge credit cards, medical bills and other debts, it can free up income that would allow you to become current on your mortgage. Once current on your mortgage, your lender may not foreclose for the duration of the Chapter 7 process.

The Chapter 13 solution

If you have a regular income, you may find that filing Chapter 13 bankruptcy is a more effective approach than Chapter 7. Chapter 13 can offer more assistance by giving you more time to catch up on your mortgage. During the process, your past-due mortgage debt is consolidated into the payment plan. Under the plan you make a monthly payment towards the debt over a three to five-year period. Since the amount you must pay each month is based on your disposable income, it may actually be lower than your normal mortgage payment.

Once the court has approved the plan, your lender may not reinstitute foreclosure proceedings against you for the duration of the bankruptcy, assuming that you continue to make your required monthly payments. By the time you make your final payment under the plan, you are caught up on your mortgage and then resume making your normal payments from this point on. This time, however, you are free of most of your other pre-bankruptcy debts.

Chapter 13 is also useful if you have a second mortgage that, together with your first mortgage, is worth more than the market value of your home. Chapter 13 treats this kind of debt as unsecured, meaning that it ends up discharged at the end of the bankruptcy.

Speak to an attorney

If you are facing foreclosure, it is important to get information about your options right away, before your financial situation gets weaker. An experienced bankruptcy attorney can walk you through the debt relief solutions available to you and recommend the one that would best fit your unique situation.