Is Bankruptcy a Good Option if Your Home is In Foreclosure?

If you owe more on the mortgage of your home than it would sell for in today's market, there's a chance you might receive a notice of foreclosure for your home. While home foreclosures are certainly stressful events, they are not undefeatable. For example, filing for bankruptcy may halt the foreclosure process in addition to helping relieve other debts that are overwhelming the finances of you and your family. However, in the event of a home foreclosure, a Chapter 7 or Chapter 13 bankruptcy could be the answer to your mortgage problems.

 A Chapter 7 bankruptcy puts an automatic stay on any collection efforts.

An automatic stay is effectively a hold or pause on any efforts made by a lender to recoup their money from you. This means that somebody who filed for a Chapter 7 or “fresh start” bankruptcy cannot be served with an eviction or foreclosure notice, nor can they be harassed by creditors demanding payment. In the scenario of a home in foreclosure or about to be in foreclosure, when the bankruptcy is filed, the individual or family will typically be allowed to continue to live in the house while the bankruptcy is processing; for a Chapter 7 bankruptcy, this usually takes four to six months. 

During this time, many people find that they are able to secure the financial relief that they need to get their affairs in order before being forced out of the home. A Chapter 7 bankruptcy is often preferable because in most cases you are not required to repay the debts that you owe. While some debts may not be covered under Chapter 7 bankruptcy (i.e. secured debts), this is still considered one of the most desirable types of bankruptcy and can be an enormous help in getting out of a deep financial hole.

A Chapter 13 bankruptcy takes longer, but it may allow you to keep your home in foreclosure.

Chapter 13 bankruptcy may be available to those who do not qualify for Chapter 7 bankruptcy and/or who have already filed for Chapter 7 bankruptcy in the past. In a Chapter 13 bankruptcy, the filer will still be required to repay some if not all of their debt, but they can often negotiate a much more acceptable repayment schedule and may even be able to negotiate the amount the creditors are willing to accept. For example, in a Chapter 13 bankruptcy, you typically work together with a bankruptcy attorney or financial advisor to submit a payment plan to the court which typically takes three to five years to complete. After this time, any amount still left in arrears will typically be discharged, as long as they are an unsecured debt. 

Mortgage loans are considered a secured debt, which means they cannot be discharged. However, people who fear losing their home in a Chapter 13 bankruptcy often find that they are more financially stable after the fact and while paying off the mortgage arrears in the payment plan during bankruptcy, may be able to keep up with their mortgage payments to keep the home after the fact.

There may be additional options for keeping your home in the event of a notice of foreclosure.

From reformation agreements to Texas homestead exemptions, there may be other ways to save your home in the event of a foreclosure depending on a myriad of eligibility requirements. However, the law in this area can be extremely complex and difficult to navigate. This is why it is highly recommended to consult with a bankruptcy lawyer in your area if you suspect your home will be in foreclosure soon or if your home is already in foreclosure. A bankruptcy attorney can help you quickly identify your options, as well as helping you through the recovery process. In fact, a good bankruptcy lawyer may even be able to offer you support and guidance as you work to rebuild your credit score following a bankruptcy and strategize ways to keep your home, leaving you in much better financial standing than you started.

To learn more about bankruptcy and other options if your home is in foreclosure, reach out to an experienced bankruptcy attorney in your area sooner rather than later.