Financial circumstances often make it challenging for homeowners to meet their monthly obligations. Economic challenges occur and sometimes a homeowner falls behind on their mortgage payments. When late mortgage payments start, too often homeowners have difficulty catching up and many then face foreclosure. When faced with foreclosure, homeowners need to understand how realistic it is to stop foreclosure with bankruptcy. This often depends on the individual homeowners situation.
When bankruptcy is sensible
For a homeowner who has fallen behind two, three or more mortgage payments, but are working, there may be an option to file Chapter 13 bankruptcy. This form of bankruptcy is known as “wage earners” bankruptcy. Chapter 13 allows a homeowner to “consolidate and repay” debt that is owed. For the homeowner who has a steady income and feels they can catch up, filing bankruptcy may be a good option.
When bankruptcy is not sensible
For the homeowner who is struggling (in spite of working) with their mortgage payments, filing bankruptcy will not do them any favors. The reason for this is very simple: If you cannot make your current payments, then adding a new payment into the mix will be even worse for your financial circumstances.
How does bankruptcy impact foreclosure?
When filing Chapter 13 bankruptcy, the court will order a “stay” on the foreclosure. This means that the lender cannot proceed until the bankruptcy is discharged by the court. Discharges occur after one of two conditions are met (1) the debtor pays off all of the debts reorganized under the bankruptcy or (2) the debtor defaults on the bankruptcy terms and the court terminates the bankruptcy agreement.
How does Chapter 13 work?
Debtors who have a regular wage, either through employment or self-employment, file a plan with the court. Once this plan has been accepted, the debtor must make regular payments to the bankruptcy trustee (or as ordered by the court) plus make their regular monthly payments. In most cases, the plan filed with the court will spread the debts in arrears (including mortgage payments) out over three to five years. In many cases, these plans allow the homeowner to catch up on their late payments and keep their homes. Chapter 13 may only be filed one time every five years.
What happens if terms are not met?
In the event that a homeowner is not able to make the monthly payments ordered by the court under the bankruptcy plan plus their regular monthly payments (on all debts) the court would order the bankruptcy discharged. In this case, the lender would be able to go back to court and file a petition for foreclosure (depending on individual state laws regarding foreclosure). Once this occurs, the homeowner has no options.
Homeowners who feel that their financial situation will improve (or has improved) may find that stopping foreclosure by filing bankruptcy allows them to regain control of their finances. To determine how realistic it is to stop foreclosure with bankruptcy, individual homeowners should contact a qualified bankruptcy attorney who understands both federal and state laws that apply to bankruptcy and foreclosure.