Foreclosure
Houses are expensive—that’s why most homeowners pay for them over 30 years, one monthly payment at a time. And it’s not uncommon for people to find they just can’t afford to keep making the payments. Keeping current on your house payments may be next to impossible If you lose your job, get divorced, face unexpected medical bills, or your payment has gone up due to interest rates or because your loan contract calls for the increase.
Chapter 13 bankruptcy can help
A Chapter 13 bankruptcy can help you save your house. How? It gives you time to make up your missed payments and can make your mortgage payments more affordable in the long term by reducing your overall debt load.
You get these crucial benefits by proposing a debt repayment plan to the court when you file for Chapter 13 bankruptcy. In the plan, you show that you have enough income to keep making mortgage payments, gradually make up the payments you’ve missed, and pay back a percentage (often very low) of your other debts such as credit cards and medical debt.
The benefits of Chapter 13 bankruptcy start the minute you file. That’s because filing for bankruptcy immediately stops a foreclosure in its tracks. As soon as you file, the Court issues what’s known as an automatic stay. This is a court order that bars all of your creditors, including mortgage lenders, from making any attempt to collect a debt you owe unless they get court permission first. And once the Judge approves your repayment plan, you will be safe from foreclosure over the entire plan period, as long as you keep making the required plan payments and your loan payments.
Chapter 13 may also help you eliminate the payments on your second or third mortgage. That's because, if your first mortgage is secured by the entire value of your home (which is possible if the home has dropped in value), you may no longer have any equity with which to secure the later mortgages. You can ask the Court to "strip off" the second and third mortgages and recategorize them as unsecured debt which, under Chapter 13, get paid back at pennies on the dollar.
Both bankruptcy and foreclosure will damage your credit score. However, sometimes bankruptcy is the preferable option when trying to rebuild credit. Here's why:
- A foreclosure will damage your credit score for many years, will not get rid of your other debt, and is particularly harmful if you are house shopping.
- In contrast, discharging your debts in bankruptcy will harm your credit score, but can also help you rebuild your score quicker than after a foreclosure. This is because bankruptcy will leave you solvent and debt-free--and therefore able to start rebuilding good credit sooner.
What about other options?
There are some alternatives to a Chapter 13 bankruptcy, such as a short sale, a deed in lieu of foreclosure or a loan modification. The first two have traditionally been hard to get from the mortgage company; in most cases they would be volunteering to lose money. A mortgage modification through the HAMP or HARP government programs would in most cases be a very good outcome. Unfortunately, like with a short sale or a deed in lieu, the mortgage company would have to agree to lose money. A fairly small percentage of people behind on their mortgages end up with a modification. More about mortgage modifications.
Walking away from the house
If foreclosure is inevitable and you are unable to make a Chapter 13 work, you may want to consider filing a Chapter 7. There are two benefits to this:
-- The Chapter 7 delays the foreclosure, allowing you time to save the money that would have been mortgage payments, making it easier to move to a new place.
-- Unlike in a foreclosure sale, if sold in a Chapter 7 the trustee who sells the house has an incentive to sell it for as much as possible. If it can be sold for more than is owed to the mortgage company, you will receive some of the proceeds before any of your unsecured debtors get paid.
For more information about Chapter 7, see How Chapter 7 Bankruptcy Works.
CAUTION
Beware foreclosure scams. When people are close to foreclosure, they become targets for an army of con artists who have descended on their communities to give them one last kick. Unless you know the person who is offering to help you save your home—for instance, a neighborhood real estate or mortgage broker, or a community bank or credit union—it’s wise to decline all offers of foreclosure assistance.
For answers to other questions you may have, feel free to visit the other pages listed under the "About bankruptcy" link. It's found at the top of every page on our site.
