Avoiding or Delaying Foreclosure through Bankruptcy

This article explains how filing for bankruptcy can help delay or avoid foreclosure of your home.

If you are facing a mountain of debt and struggling to prioritize paying your bills, losing your home is probably the scariest situation you can imagine. Bankruptcy may help you free up money in your budget to meet your mortgage payments and save your home. If your home is in danger of foreclosure, bankruptcy may help you avoid foreclosure entirely or delay it while you work with your lender to come up with alternative payment arrangements.

What is foreclosure?

 Foreclosure is a multistep process a lender goes through to get back money they have lent to the homeowner, usually by auctioning the property off to the highest bidder. When you take out a loan on real estate, your lender almost always has you sign two very important documents: the promissory note and a security agreement. The promissory note stated that you would repay the loan. The security agreement gave the lender the legal right to place a lien on your home in case you did not repay the loan. The time you have until the foreclosure takes place depends on the state you live in. Illinois for example is a Judicial Foreclosure State, and Missouri is a Non-Foreclosure or also called Trustee Sales State. The judicial process takes much longer than the process through the trustee in Missouri. In either process you still have enough time to take including filing bankruptcy to stop the foreclosure.

 Foreclosure and Chapter 13

Chapter 13 bankruptcy allows you to include your past due mortgage payments in your bankruptcy plan to avoid foreclosure. The difficulty with this scenario is that you must have enough money to pay your bankruptcy plan and your current ongoing mortgage payments. Your attorney will work with you to determine if this situation is possible and help develop a budget to determine how much you can afford to pay in to your bankruptcy plan. It is possible that the plan payments to your other creditors will be low enough that this type of plan will be successful.

Chapter 13 bankruptcy can be a very attractive option if you have multiple mortgages that exceed the value of your home. If you have a second or third mortgage on your home, but your home’s full value is nearly equal to your first mortgage, Chapter 13 bankruptcy can help you get rid of the additional mortgages on your home. Chapter 13 bankruptcy will “strip away” additional mortgages in excess of the value of your home and categorize them as unsecured debts. The effect of this categorization is that the additional mortgages will paid with other unsecured creditors in the bankruptcy and be discharged at the end of your bankruptcy plan.

 Foreclosure and Chapter 7

If you cannot afford to make plan payments and your mortgage payments under Chapter 13 bankruptcy, Chapter 7 bankruptcy can help you delay the foreclosure. Chapter 7 bankruptcy will not help you avoid foreclosure, but it will delay the foreclosure while you make alternative arrangements and save some money while living in your home until the foreclosure proceeds. Chapter 7 bankruptcy will discharge almost all of the debts you include in the bankruptcy, including your primary mortgage.

 Why doesn’t bankruptcy always work to avoid foreclosure?

Bankruptcy eliminates your personal obligation to repay the debts included in the bankruptcy, but bankruptcy does not erase the lien that is created by the security agreement you gave the bank when you signed the loan documents. This means that once the automatic stay is lifted, the creditor can pursue its collateral, in this case your home, despite the discharge of your debt unless you have made other arrangements with the lender.

It is important to discuss your goals and priorities in considering bankruptcy with a qualified St. Louis or St. Charles bankruptcy attorney. A qualified bankruptcy attorney will help you negotiate with your lender after the bankruptcy filing to do everything possible to keep you in your home. Every situation is unique, so it is important to discuss the facts of your case with your attorney.

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