Foreclosure

How Bankruptcy Can Help With Foreclosure

If you are facing foreclosure and cannot work out a deal or other alternative with the lender, bankruptcy may help.

If you get behind on your mortgage payments, a lender may take steps to foreclose--that is, enforce the terms of the loan by selling the house at a public auction and taking payment of your loan out of the auction.

This won't happen overnight. The foreclosure process typically starts after you fall behind on your payments for at least two months, and often three or four. That gives you time to try some alternate measures, such as loan forbearance, a short sale, or a deed in lieu of foreclosure.

But if you've already tried and failed with these measures, now is a good time to consider bankruptcy as a possibility for avoiding or stalling foreclosure. Here are some ways that filing for bankruptcy can help you.

How Chapter 13 Bankruptcy Can Help

Many people will do whatever they can to stay in their home for the indefinite future. If that describes you, and you're behind on your mortgage payments with no feasible way to get current, the only way to keep your home is to file a Chapter 13 bankruptcy.

How Chapter 13 works. Chapter 13 bankruptcy lets you pay off the "arrearage" (late, unpaid payments) over the length of a repayment plan you propose--five years in some cases. But you'll need enough income to at least meet your current mortgage payment at the same time you're paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you'll avoid foreclosure and keep your home.

2nd and 3rd mortgage 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. That allows the Chapter 13 court to "strip off" the second and third mortgages and recategorize them as unsecured debt --which, under Chapter 13, takes last priority and often does not have to be paid back at all. For more information on Chapter 13 bankruptcy, see the Chapter 13 Bankruptcy area of our website.

How Chapter 7 Bankruptcy Can Help

It may be that you'll have to give up your home no matter what. In that case, filing for Chapter 7 bankruptcy will at least stall the sale and give you two or three more months to work things out with your lender. It will also help you save up some money during the process and cancel debt secured by your home.

Saving money. During a Chapter 7 bankruptcy, you can live in your home for free during at least some of the months while your bankruptcy is pending--and perhaps several more after your case is closed. You can then use that money to help secure new shelter.

Canceling debt. Chapter 7 bankruptcy will also cancel all the debt that is secured by your home, including the mortgage, as well as any second mortgages and home equity loans.

Canceling tax liability for certain property loans. Thanks to a new law, you no longer face tax liability for losses your mortgage or home-improvement lender incurs as a result of your default, whether you file for bankruptcy or not. This new law applies to the 2007 tax year and the following two years.

 

For a free consultation about foreclosure, contact us toll-free at (800) 775-1820. We are available to represent people in DuPage County and the surrounding parts of Illinois, including Will, Cook, Kendall, Kane, Kankakee, Lake, McHenry, LaSalle and Grundy Counties.