Can bankruptcy help to save your home from being foreclosed?

This is a guest post by Sophia Kinsella. Sophia is a financial writer and offers her advice to many people suffering with business related problem. She contributes articles to many sites and guides people through different forums.

Foreclosure is undoubtedly a nightmare for every homeowner. However, it’s possible to avoid foreclosure by filing bankruptcy. This will help to stall foreclosure proceedings and other notorious debt collection practices. In fact, through bankruptcy many homeowners have been able to save their properties permanently.

Peter Orville, an experienced attorney from Binghamton, N.Y., believes “It’s the best tool there is for people behind in payments but who have ongoing income”. The homeowners struggling to pay off the mortgage loan may get some time to continue their payments after filing bankruptcy. This helps a lot in averting foreclosure by paying off the mortgage.

What is the legal solution that bankruptcy offers?

Many people avoid bankruptcy as it stays there on the credit report for a period of almost 10 years. But, for the defaulting homeowners this is definitely an effective solution to save their houses. Right after bankruptcy is filed, the court immediately issues an “automatic stay” on all the collection attempts. If there is a foreclosure on the cards, then the “automatic stay” will postpone the sale for 3 to 4 months. In many states, lenders are obligated to give a notice in advance before planning a foreclosure sale. In such states the “automatic stay” cannot stop the foreclosure.

How Chapter 13 bankruptcy helps?

Chapter 13 bankruptcy may help to stall the foreclosure process but for that you need to get your repayment plan approved by the bankruptcy court. You’ll have to prove that for the next 3 to 5 years you’ll be able to continue your mortgage payments successfully under the repayment plan. However, there is a process named “lien stripping” through which the second mortgages get discharged in Chapter 13. You can even steer clear of the tax liabilities on the forgiven debt. In addition to that, it’s possible to retain the ownership of the property. Lenders won’t be able to continue any collection activity including wage garnishments, repossession and filing lawsuit either. The debtor will only have to go through the “means test” successfully to be eligible for filing Chapter 13 bankruptcy.

What are the specifications for Chapter 7 bankruptcy?

Debtors who have no other way to pay off debts opt for Chapter 7 bankruptcy or the “liquidation”. In Chapter 7, all of your assets will be seized by the bankruptcy court and the trustee will take the necessary action to discharge all or some of the debts. Chapter 7 hardly does anything to cancel foreclosure. This is because, at the time of taking out the mortgage loan, borrowers have to sign two essential documents. The promissory note to pay back the mortgage loan and the security agreement which is considered to be a lien to accomplish performance on the promissory note. The personal liability of the promissory note can be discharged through Chapter 7, but it’s not possible to abolish the lien. As per the lien, you’ll have to lose your house ultimately. However, at the initial level, Chapter 7 bankruptcy can put a hold on the foreclosure procedure for 3 to 4 months.

Exceptions that homeowners should know

Whether you opt for Chapter 7 or Chapter 13 bankruptcy, the foreclosure procedure will be stalled for a few months. However, there are exceptions to the obligation also. Check out the exceptions below:

  • The motion to lift the automatic stay: If the creditor officially requests to the bankruptcy court and gets the permission to go ahead with the foreclosure, then the compulsory 3 to 4 months won’t be able to help anymore. In that case, the court will allow to stop the procedure for only 2 months. However, the time span depends largely on when the lender files the “motion to lift the automatic stay”.
  • Things change when the lender issues foreclosure notice: The bankruptcy court won’t be able to put a hold on the sale if the foreclosure notice has been sent already. The lender may apply to the court to lift the “automatic stay”. So, it may turn difficult for the homeowners to save the property ultimately.

As you can see, in Chapter 13 bankruptcy, there is still a chance for you to save your property from foreclosure. In Chapter 7 may not be able to help you to save your property, it’s just a possibility. The legal procedure isn’t that simple either. The laws also differ from state to state. So, before filing bankruptcy to deal with your financial obligations and foreclosure, you must know the legal details. Consulting an efficient attorney may help you to understand the legal nitty gritties.

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