Bankruptcy may be used to help people faced with a pending foreclosure. Chapter 13 is a type of personal bankruptcy that can often be used to stop the foreclosure process and provide the property owners time in order to pay back the amounts they are behind.
The Foreclosure Process
A foreclosure typically occurs after a homeowner has fallen behind on mortgage payments for a number of months. Foreclosure basically means that the home or real estate is going to be sold at a public auction. The homeowner will receive notification of the approaching sale as part of the process. Once you receive notice of the pending foreclosure sale, you should review your chapter 13 bankruptcy options as a possible means of avoiding foreclosure and curing the arrears you owe to the lender over a period of time. It is important to act quickly if you do receive a notice of a pending foreclosure sale to ensure that you are fully aware of your options. If you do decide to file a chapter 13 to stop foreclosure, the proceeding must be filed prior to the foreclosure sale date. Once the foreclosure sale is held, it is not possible to unwind or void the sale through bankruptcy.
When a chapter 13 proceeding is filed, the bankruptcy court automatically issues an order for relief from creditor collection, including foreclosure. This results in something often referred to as the "automatic stay." The automatic stay requires all creditors to immediately stop all collection activities. This includes all collection efforts, including phone calls, letters, lawsuits, garnishments, and foreclosure.
Chapter 13 and Foreclosure
If you are faced with a foreclosure, or even if you are just behind on your mortgage with no feasible way to become current, chapter 13 may be an option to keep your home and to cure your mortgage arrears over time. Chapter 13 bankruptcy provides you an opportunity to catch up your mortgage arrears over the length of the chapter 13 process. The length of the chapter 13 process depends on a number of factors, including your household income, family size, and other debts.
In general, when you file a chapter 13, you file a "Plan" that provides the manner in which you will pay back your various creditors. When you use chapter 13 to stop a foreclosure, part of the bankruptcy Plan will be to pay back the mortgage arrears over time, while also paying your ongoing monthly mortgage payment, in order to ensure you are able to remain current on your mortgage payment while the bankruptcy is pending. If you are able to make all of the required payments established by the Chapter 13 Plan, you will be able to avoid foreclosure and keep your home.
Second Mortgage – Lien Strip
Chapter 13 bankruptcy can also sometimes be used to eliminate second mortgage debt and payments. In chapter 13, if you owe more on your first mortgage than your home is worth, you may not have equity to secure a second mortgage or other junior leinholders. In this scenario, you can often use Chapter 13 bankruptcy to "strip off" the second (or third) mortgage debts and treat those amounts as general unsecured debt. In chapter 13, general unsecured debt takes a back seat to all of your other primary debts, and often receives a significantly reduced percentage of their claimed amount owed, and sometimes are not paid at all. If you are able to successfully complete a chapter 13 Plan and lien strip a second mortgage, you will be able to clear the second mortgage obligation from your home. If you are looking at the option of using chapter 13 bankruptcy to stop a foreclosure, this might be one of the additional benefits of the process.