Delaying Foreclosure through Bankruptcy

You will receive an automatic stay on any foreclosure if you declare bankruptcy. This applies in both Chapter 7 and Chapter 13 situations. In either case, however, the stay is temporary. The lender cannot move forward with any collection until the debt has been settled or discharged in court. Then, the foreclosure may proceed if you have not resolved the debt through the bankruptcy case. Therefore, when you declare bankruptcy, you are only delaying a foreclosure, not preventing it.

Foreclosure and Chapter 7 Bankruptcy

There are many different forms of bankruptcy proceedings. With a Chapter 7 bankruptcy, the debtor filing does not have sufficient income to repay debts, even on an adjusted schedule. For example, if you have lost your job and been unable to find another source of employment for more than six months, there is reason to believe you will not have income to meet any payment schedules. The same may be determined if you have become disabled, ill or otherwise unable to meet your financial obligations. In this case, the court will begin prioritizing your debts. Your assets will be sold in order to settle debts.

While the process occurs, your foreclosure will be stayed. However, since real estate debts are senior debts, your mortgage will be one of the first loans the court attempts to settle. Selling your home to foreclosure is often the means to resolve this issue. You may argue for a discharge, which would absolve you of the debt. Discharges are granted only in rare circumstances and typically only if a small debt remains. 

Foreclosure and Chapter 13 Bankruptcy

Chapter 13 bankruptcy does not result in a liquidation of assets. In this form of bankruptcy, you will have to show you have an income that can result in the repayment of your debts over time. The reason to file, then, is so the judge can determine a schedule for repayment that allows you to sustain your lifestyle and stops creditors from acting on liens. Chapter 13 is also known as reorganization; it is generally preferred to Chapter 7 where possible.

When you file for Chapter 13, you will still receive an automatic stay on your foreclosure. Once the debt has been restructured, you may find your mortgage has been restored and your foreclosure stopped. You will need to meet the terms of your new payment plan in order to restore equity in your home in the long run.

Preventing Foreclosure with Bankruptcy

Filing for bankruptcy is almost always a last effort for a borrower who can find no other way to escape lenders. Where possible, you will benefit from simply contacting your lender directly to restore your mortgage through options like forbearance or deferral of payments. These options are only open before your mortgage slips into default, however. If you have missed the window to save your mortgage through alternate means, bankruptcy will not save your credit or absolve you of the debt. It will, however, give you a chance to temporarily stop foreclosure activities while you work on a plan to restore your finances.

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