Can bankruptcy stop foreclosure? Yes, it can. If you’re behind on your expenses, are rapidly incurring major debts, and are behind in your mortgage payments, you’re probably going over your options for credit relief. Many folks are afraid that they are going to lose their home if they file for bankruptcy. Some of those folks are correct. The first question you’ll need to ask yourself is whether or not you want to keep your home. If the answer is yes, then there are options available to you.
Do You Want to Keep Your Home?
If you don’t feel like keeping your home is a viable financial option, you can stop the foreclosure temporarily by filing for Chapter 7. You will not get to keep your home, but it will buy you some time. You will be able to discharge any outstanding debt you owe, including arrearages, and rebuild your finances while you’re looking for a new place to live. You will not have to pay your mortgage while your case is pending.
If you do want to keep your home, then you won’t (necessarily) want to file under Chapter 7. You can file under Chapter 13, reorganize all outstanding debts, and then repay some of those debts over a three- to five-year period.
If you are behind on mortgage payments, the bank will declare that your loan is in default. They will then begin the process of foreclosure. You will likely be several months behind in payments and potentially owe the bank thousands of dollars in arrearages. Chapter 13 allows you to repay the arrearages over a fixed amount of time and on a fixed schedule. Below, we’ll discuss more on how that works.
Chapter 13 Bankruptcy and Foreclosure
Filing for any kind of bankruptcy can delay the process of foreclosure. However, Chapter 13 provides a unique framework for rehabilitating your mortgage. Those who want to keep their home but are unable to get current on their mortgage payments can file under Chapter 13. Chapter 13 allows those in debt to consolidate all of their debts into a single lump-sum payment. This payment is made to the bankruptcy trustee who disburses the amount to your creditors.
Highest on the list of creditors to be repaid is priority secured debt. Lowest on the list is unsecured debt like credit card payments or medical debt. Mortgage payments and car loans are considered priority secured debt.
Essentially, you will be able to repay the arrearages on your mortgage and so long as you remain current on your Chapter 13 payments and your mortgage payments, you may qualify to have other outstanding debts stripped off or discharged, at least partially. You will, however, need enough income to pay your monthly mortgage payments plus make your Chapter 13 payments. However, the Chapter 13 payments are structured around your current finances.
Chapter 13 and HELOC Loans
If you’ve taken out a second (or third) mortgage against the equity on your home, a Chapter 13 bankruptcy can strip those mortgages off and reclassify them as unsecured debt. Since unsecured debt is given the lowest priority in Chapter 13, most or all of those loans can be discharged. This approach works best when the value of your home is less than the amount secured by your primary mortgage. Home equity lines of credit can nonetheless be rolled into a Chapter 13 bankruptcy.
The Homestead Exemption
All states and federal provisions allow for a homestead exemption which allows a bankruptcy filer to protect a certain amount of equity in their home. In some cases, those filing under Chapter 7 can discharge other debts that are hampering their finances in order to repay arrearages and make future payments on their mortgage. Chapter 7 bankruptcy allows filers to protect a certain amount of equity on their home from liquidation. You’ll have to discuss whether or not this option is right for you with your bankruptcy attorney and you will need to reaffirm your mortgage debt while your Chapter 7 case is being processed.
Talk to a North Carolina Bankruptcy Attorney Today
Can bankruptcy stop foreclosure of your home? With the help of a skilled bankruptcy attorney, there may be a way to keep your home and stabilize your finances. Call the Law Office of Jack G. Lezman, PLLC today for more information!