Bankruptcy Foreclosure or Both
If your home is in foreclosure and you've tried to work out a solution with your lender and failed, a more drastic option available to you is bankruptcy. If you do consider bankruptcy, here are a few things you should know about how bankruptcy will affect the foreclosure process and your credit.
Probably the best benefit that bankruptcy offers when your home is in foreclosure is the automatic stay. This is an order issued by the bankruptcy court that temporarily puts a halt to all collection activities, including foreclosure, that are being taken against you. While your lender may be able to have the automatic stay removed in order to proceed with foreclosure, it may still give you time to work out an alternative solution with your lender.
A Chapter 7 bankruptcy is filed by a debtor who wants to liquidate all of their debts and start new. However, a lien was likely placed on your home as security for your mortgage. Security liens are not dischargeable in a Chapter 7 bankruptcy. So, the most that a Chapter 7 bankruptcy can do for you is to buy you a little more time work out a solution with your lender. If you cannot reach an agreement, foreclosure proceedings will eventually continue.
In a Chapter 13 bankruptcy, you propose a repayment plan to the bankruptcy trustee. If the trustee agrees to the plan, you will have a three to five year period to repay your creditors. Usually, the plan reduces your debt obligation. Your mortgage can be included in the repayment plan, but you will be expected to continue making current payments and additional monthly payments for the amount of arrearage until your mortgage becomes current.
If you don't have enough income to make your current mortgage payments, the required payments on the arrearage and the payments to remaining creditors under the repayment plan, you may still loose your home.
However, a Chapter 13 bankruptcy may help you if you have a second mortgage by reclassifying that mortgage as an unsecured debt, which has the lowest priority and may not have to be repaid if your available income after payment of necessaries (housing, food, clothing) is insufficient to repay all of your debts.
Filing for bankruptcy has some negative consequences.
- The trustee may void a deed in lieu of foreclosure to your lender that was made within 90 days prior to filing for bankruptcy if there was any equity in your home
- The trustee may void any conveyance or transfer of your property if it was made with the intent to defraud your other creditors or when you were insolvent with a creditor if it was made to defraud or if the agreement was made to defraud other creditors
- If you are late in making any payments under your repayment plan, your bankruptcy case may be dismissed and your lender will likely proceed with foreclosure
- A bankruptcy will negatively affect your credit score for 10 years making it more difficult to buy a house in the future
Bankruptcy is the option of last resort. You should thoroughly discuss this option and others with a bankruptcy or foreclosure attorney as early as possible in the foreclosure process.
Bankruptcy Foreclosure or Both
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