Bankruptcy isn’t a step to be considered lightly. It remains on your credit report from seven to ten decades, based on the chapter you record. The automatic stay prevents creditors from proceeding with litigation and collection efforts. If you’re behind on your mortgage payments and facing foreclosure, the perfect bankruptcy can prevent foreclosure. You will not be lonely. Almost 1.4 million personal bankruptcies were filled with 2011, according to the U.S. Courts.
Chapter 7
Filing a Chapter 7 personal petition will delay the foreclosure. Chapter 7 discharges nearly all debts, including any arrearage or shortfall on the mortgage. You wo not be liable for paying the difference between the mortgage balance and the auction cost of the home. However, Chapter 7 is a stop-gap measure. When the bankruptcy is closed the foreclosure can proceed and, in most cases, usually will.
Chapter 13
A Chapter 13 bankruptcy petition stops the foreclosure. The investor pays the bankruptcy trustee a sum dependent on the debtor’s disposable income each month from 36 to 60 months. The payments must be enough to cure the arrearage or default sum, or so the mortgage is caught up at the end of the 36 to 60 months. Any mortgage payments made directly by the investor to the mortgage company must continue to keep the mortgage current or the foreclosure procedure can be started again.
Stripping Second Liens
Junior mortgages like second mortgages, or home equity loans, typically do not initiate foreclosure procedures. They are only paid if the house is auctioned for enough cash to pay off the mortgage. That’s impossible with a home that is submerged. The second mortgage, or home equity loan, can be stripped at a Chapter 13 procedure, if the appraised value of the home is less than the initial mortgage. This requires filing of legal documents with U.S. Bankruptcy Court. It isn’t automatic.
Warning
There are cases where filing bankruptcy only delays the foreclosure. If the Chapter 13 payments won’t cure the default, the mortgage company will petition the bankruptcy to lift the automatic stay and proceed with the foreclosure. The stay may also be raised if the debtor has no equity in the home. On the other hand, the argument against raising the stay is that the land is required for the reorganization throughout the bankruptcy. The other solution for your foreclosure to proceed is if the mortgage holder files an adversary proceeding against the debtor and wins. The adversary proceeding is a lawsuit within the bankruptcy. The most common reason it’s filed is fraud.