Saving your home is possible with either type of bankruptcy
When faced with foreclosure, bankruptcy often offers the best way out.
When many people are facing foreclosure, they think there is nothing that can be done to prevent the sale of the home. Although foreclosure is a serious threat, it is important to realize that you are not powerless. If you are in such a situation, filing bankruptcy is often the most effective way to stop foreclosure. However, depending on how your finances look, you might be better off filing one type of bankruptcy over another.
Chapter 7 may be right for some
When you file for any type of bankruptcy, the automatic stay begins immediately. Once the stay is in effect, your creditors may not take any more actions to collect the debts owed. As a result, the foreclosure process is halted. The protections that the stay provides are an invaluable part of the bankruptcy process, as they give debtors time to plan their next moves.
Though the stay stops foreclosure, its protections are not eternal. In Chapter 7, if you are unable to bring your mortgage current during the process, your lender has the option of asking the court to end the stay, allowing the foreclosure process to begin again. However, Chapter 7 makes it significantly easier for debtors to catch up on their mortgages, by quickly eliminating most forms of unsecured debt, such as credit cards and medical bills. Once these debts are eliminated, you may find that you are able to catch up with your mortgage, as more of your income has been freed up to do so.
Since Chapter 7’s protections against foreclosure are only temporary, it is generally a good choice for those struggling with their mortgages because of other unsecured debts. However, it is likely a poor choice if you cannot catch up with your mortgage quickly once relieved of your other debts.
Chapter 13 is better for most
If you are employed and need more time or help to catch up with your mortgage, Chapter 13 is likely the better way to go. In this type of bankruptcy, the protections of the automatic stay last throughout the bankruptcy process, assuming that you continue to fulfill your duties under the payment plan.
In Chapter 13, your mortgage arrearages become part of the payment plan. The plan allows you to pay them off over three to five years using monthly payments. The amount that you must pay each month is calculated based on your disposable income, so it is kept at an affordable level.
As long as you make your agreed payment each month, your lender is forbidden by law to foreclose. At the conclusion of the plan, you are caught up on your mortgage and free of most other debts that were paid off or eliminated during the process, allowing you a financial fresh start.
If you are underwater on a second mortgage, Chapter 13 is especially useful. Second and subsequent mortgages are treated as unsecured debt in Chapter 13, if the total amount of your outstanding mortgages exceeds the value of your home. Like other unsecured debt, Chapter 13 can relieve you of your obligation to repay your second mortgage debt in such a case.
Talk to an attorney
If you are behind on your mortgage, bankruptcy may or may not be the best option for you. When faced with this situation, contact an experienced bankruptcy attorney. An attorney can review your situation and recommend the most viable option, based on your circumstances and goals.