Chapter 7 bankruptcy can provide either a permanent or a temporary solution to a foreclosure problem, depending on your circumstances. If you want to permanently stop foreclosure, you’ll need to get current on your payments by the end of your Chapter 7 bankruptcy. However, you can still temporarily halt foreclosure proceedings if you file for bankruptcy, and this can sometimes give you the time that you need to get the money to get caught up with your mortgage.
If you are current on your payments but expect to fall behind because of a spike in interest rates or a loss of a job, Chapter 7 bankruptcy might be your best option to save your house. Chapter 7 bankruptcy will allow you to discharge unsecured debts such as credit card bills, which will free up funds for you to pay your mortgage.
In order for this to work, you have to have less equity in the home than you are allowed to exempt from bankruptcy in your state. In other words, you should not have un-exempt equity in your home. The homestead exemption in Missouri is $15,000. If you house is worth $100,000, and your mortgage is $60,000, the equity you have in your home is $40,000. You would not be able to exempt $40,000 with your homestead exemption of only $15,000. In this case, your attorney most likely will suggest to file a chapter 13 instead of a chapter 7.
It’s important to talk to a bankruptcy attorney and find out whether you will be able to keep your home before filing for Chapter 7 bankruptcy because you can’t cancel the bankruptcy proceedings once they’ve started. In most cases, the court disallows this to prevent abuse of the bankruptcy system and to protect your creditors from losing their money to your insolvency. However, it will still be possible to convert to a chapter 13 bankruptcy if it becomes necessary.
Chapter 7 and Homes Currently in Foreclosure
If your home is currently in foreclosure, filing Chapter 7 can provide temporary relief. When you file for Chapter 7 bankruptcy, the automatic stay takes effect and will stop collection efforts such as a forclosure. This means that creditors can’t take any collection action against you while you are protected by the automatic stay. However, the mortgage company most likely will file a motion for relief from the automatic stay in order to proceed with the foreclosure. The chapter 7 will stop a foreclosure but depending on the mortgage company’s actions, it will be for only a short period of time. In the case the mortgage company does not file a motion for relief, the automatic stay will end with the discharge and closing of your chapter 7 case. Once the bankruptcy case ends, however, if you haven’t been able to reaffirm, or make a new payment agreement on, your mortgage, the bank can foreclose on it. If you can get your mortgage payments current by the end of the bankruptcy case, you will not face foreclosure.
If you are unable to make your mortgage payments and refinancing your mortgage is not an option, you might want to consider filing Chapter 13 bankruptcy instead of Chapter 7. Chapter 13 bankruptcy allows you to make a structured repayment plan with your creditors, including your mortgage lender. You keep making your ongoing mortgage payment and you will be allowed to catch up with your late payments over a period of 4 years. Other debts, such as credit card and medical bills are being paid based on the amount you have left over each month and completely erased at the end of the chapter 13 case. This will let you get current on your mortgage so that you don’t go into foreclosure. The same automatic stay applies when you file for Chapter 13 bankruptcy, so your bank won’t be able to foreclose on the house during your bankruptcy.
The biggest advantage that Chapter 13 has over Chapter 7 is that it lowers payments to secured creditors such as your car creditor by stretching out the loan over the length of the chapter 13 plan, lowering the loan amount if your car was purchased more than 2.5 years ago to the value of your car, and changing the interest rate to the court’s interest rate which is in most cases lower than the contract interest rate.