To most people, bankruptcy conjures up frightening images - losing one's possessions, particularly their home. But bankruptcy can actually be the solution to imminent foreclosure, if done properly. There are two types of bankruptcy - Chapter 7 and Chapter 13. Chapter 7 is the bankruptcy most people are familiar with, in which you liquidate any of nonexempt assets when you can no longer afford your mortgage, car or credit card payments. A Chapter 13 bankruptcy, however, allows you to pay back a fractional share of your debts and catch up on late mortgage payments. A Chapter 13 bankruptcy can even strip your second mortgage off your property in some cases, allowing you to get back on your feet financially.
Once a homeowner files for bankruptcy, foreclosure proceedings are brought to halt, as are oftentimes harassing calls from collectors, both of which give the borrower time to catch up on payments and get back on their feet financially. Though a Chapter 7 bankruptcy initially stops foreclosure proceedings, it almost always ends in a liquidation of all assets, including the home. A Chapter 13 bankruptcy, on the other hand, damages one's credit temporarily but may allow the borrower to remain in their home and keep their possessions. Bankruptcy filers who opt for a Chapter 13 are in a repayment plan which lasts for three to five years, usually issuing an income-based budget that includes monthly payments to trustees. The bankruptcy trustee will receive the debtors' payments while they are in the plan.
The trustee then applies payment to the creditors, first paying off secured debt, namely your mortgage, then paying off any unsecured debt, starting with back income taxes and moving on to credit card and medical bills. Since creditors are paid back a percentage of the debt based on your disposable income and budget considerations, most bills can be paid off for a fraction of their full balance. Though the bankruptcy code can provide much-needed aid to struggling homeowners, it generally will not reduce the principle balance on your primary residence, and it usually cannot lower the interest rate or lengthen the terms of the loan. A loan modification is often a better option to permanently lower your mortgage payment.
A very helpful part of the Chapter 13 bankruptcy process, however, is that the courts can strip off a second lien from the property, such as an equity loan or line of credit. This occurs when the value of the home falls below the balance of the first mortgage. Simply put, when there is no longer enough value on the home to secure the second lien, it becomes unsecured debt, which becomes the last to receive payment in a Chapter 13 bankruptcy. This often results in the second mortgage, which can be tens of thousands of dollars, to be paid off in the same pennies-on-the-dollar fashion as other bills.
Though there are significant disadvantages to filing for bankruptcy - it can take up to 240 points off of your credit score - it is an option to be seriously considered when facing sever financial distress, especially the possibility of foreclosure. With the additional benefits of filing for a Chapter 13 and stripping a second mortgage, bankruptcy can help you save your home and allow you to get back on your feet within three to five years. If you are experiencing financial difficulty or are concerned about facing foreclosure, we can help guide you through the bankruptcy process. Please contact our office for a free consultation, and we will put our over 25 years of combined experience to work for your particular situation.
Information in the above article is for educational purposes only and does not create an attorney-client relationship. You should not construe this to be a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel.
