Undoubtedly, nothing is scarier than the thought of losing a home while struggling with overwhelming debts. For many individuals, the home could be their only worthwhile investment. Fortunately, there are steps you can take to prevent foreclosure, even if you have received a notice from the bank or your lender.
Whether you have fallen behind on your mortgage payments due to a medical emergency, job loss, or other financial problems, understanding your legal rights and the options you have to prevent foreclosure is key. Filing for bankruptcy stands as one of the best tools available to prevent foreclosure.
If you are at risk of losing your home to your lenders and are wondering whether filing for bankruptcy can offer debt relief, you are in the right place. Read on to understand how bankruptcy works and whether it is the ideal tool for protecting your home and future.
Understanding Bankruptcy and How it Prevents Foreclosure
When you fall behind on your mortgage payment for any of the reasons mentioned above, including a job loss, your lender or bank will send you notice of the missed payments and the deadline for curing the default. When you fail to cure that debt within the set time (usually 90 days), the bank could initiate a foreclosure process as outlined in your mortgage contract.
The foreclosure process involves your creditor repossessing and selling your home at a public auction. Then the lender will use the proceeds from the sale to pay off the mortgage and cover any legal expenses.
Generally speaking, the foreclosure process usually takes time. Most lenders will not start foreclosing on your home until you are about two (2) to three (3) months behind on your mortgage payments. That gives you time to explore other alternatives to foreclosure, including short sale, loan forbearance, and bankruptcy.
Once you file for bankruptcy, the court will grant you an Order for Relief, also known as an automatic stay. The automatic stay directs your lenders to immediately stop all debt collection efforts, including trustee sales and lawsuits.
The automatic stay also helps prevent wage garnishment, giving you ample time to fix your finances. Even if the lender has already initiated foreclosure, the bankruptcy’s automatic stay can immediately pause everything.
The Specific Effects of Filing for Bankruptcy When Facing Foreclosure
If you want to file for bankruptcy to prevent foreclosure proceedings on your home, understanding the type to choose is critical. The type of bankruptcy you should file depends on your unique financial circumstances and goals. Below are three common types of bankruptcy you should consider if you want to prevent home foreclosure:
Chapter 7
Also known as liquidation bankruptcy, Chapter 7 bankruptcy can temporarily stop the foreclosure process by canceling all the debts you have secured using your house, including home equity loans and mortgages. Chapter 7 can also prevent wage garnishment for up to a specific period.
Filing for Chapter 7 bankruptcy could be a brilliant idea if you have a limited income and require additional time to clear your unsecured debts. However, liquidation bankruptcy is not a long-term solution for your debts, as it only gives you a few months to clear your debts. After that, your creditor can file a petition to lift the automatic stay and proceed with the foreclosure process.
However, not every person qualifies for liquidation bankruptcy. To qualify for this Chapter, you must pass the “means test," which requires you to meet the median income requirements. Filing for liquidation bankruptcy could help if you want a quick debt discharge and are willing to give up your home.
However, when you default on your payments and the equity in your home is not fully exempt, a liquidation bankruptcy can help because it lacks a way to organize a repayment plan, which is only available in Chapter 13. That means your lender’s trustee can sell your house to clear or catch up your mortgage if he/she wins the motion to lift the automatic stay.
Chapter 13
If you are behind on your mortgage and there is no other way to have a steady income, and you want to keep your home despite your financial challenges, filing for Chapter 13 bankruptcy would be a wise idea. Generally speaking, Chapter 13 bankruptcy, also known as “reorganization” bankruptcy, lets you clear your debts over the course of a repayment plan you propose (typically 3 to 5 years).
Then, your creditors and the bankruptcy trustee will decide whether to approve or oppose your proposed repayment plan. If they oppose with the help of your attorney, you can amend it and let the judge review it at the confirmation hearing. If the judge approves or confirms the repayment plan, you can begin making your payments.
You can prevent foreclosure and keep your home as long as you make all the necessary payments through the end of your proposed repayment plan. However, like Chapter 7, not every person qualifies for Chapter 13 bankruptcy. To qualify for Chapter 13, you need sufficient income to clear your monthly expenses, current mortgage payment, and other due debts simultaneously.
Additionally, you must also pay the required filing fee and submit a certificate showing you have received counseling. Counseling is vital because it helps the court assess whether you have sufficient income to meet the proposed repayment plan.
Chapter 13 can also help eliminate a junior mortgage, including a HELOC or second or third mortgage. Filing for Chapter 13 entitles the bankruptcy court judge to recategorize your second and third mortgages as unsecured debts. Fortunately, under this option, you do not have to prioritize paying off your unsecured debts.
Chapter 11
While Chapter 11 is designed for the reorganization of debts by businesses, LLCs, and partnerships, individuals with significant assets and debts could also benefit from this option. Unlike a Chapter 7 bankruptcy, which requires you to liquidate your property to pay your debts, a Chapter 11 bankruptcy focuses on creating a repayment plan that allows a business to continue operating while gradually paying its creditors over the agreed-upon period.
However, like a Chapter 13, your creditors and the court must approve the reorganization plan under Chapter 11. Nonetheless, Chapter 11 bankruptcy can provide you with a second chance to fix your finances and catch up with your mortgage without worrying about your creditors' debt collection efforts. Here are a few advantages of filing for this option:
- It allows you to continue with your business operations
- You can propose a debt repayment plan
- There is a potential for improved business profitability
- You will retain control of your business and its operations
Generally speaking, the ideal type of bankruptcy you should file depends on various factors, including your debt load, assets, and income. Before making this critical decision, take a step back and assess your overall financial situation. The legal guidance of a skilled bankruptcy attorney could also prove helpful if you are at risk of losing your home to your creditors through foreclosure.
What Will Happen When I Fail to Keep Up With the Chapter 13 Repayment Plan?
While financial changes may occur, that does not automatically mean you will default on the confirmed repayment plan. When that happens, you work with your attorney to request the modification of the amount you should pay to clear unsecured debts. However, even if this option is not viable, the court could agree to discharge your debts due to hardship.
If either of these options is viable or practical, you can switch to liquidation bankruptcy. Having the legal representation of a skilled attorney during the bankruptcy filing process is key to achieving a positive outcome.
How to File for Bankruptcy and Stop Foreclosure Proceedings
Filing for bankruptcy when you want to prevent foreclosure can be a lengthy and confusing process. If you plan to file for bankruptcy to stop foreclosure, attention to detail and careful planning are key. If you have a seasoned bankruptcy attorney, he/she can help you every step of the way to secure a desirable outcome. Here is a step-by-step guide on what to expect:
- Your Attorney Will Evaluate Your Case
An initial case evaluation is vital to determine whether you are an excellent bankruptcy candidate. Your attorney will begin by reviewing all your financial documents, including debts, income records, mortgage statements, and all other available legal options.
- You Will Complete a Counseling Session
As mentioned in the previous sentence, when filing for Chapter 7 bankruptcy, the court will require you to complete a compulsory counseling session as a part of the eligibility criteria. Counseling helps the court determine whether you have sufficient income to meet the proposed repayment plan.
- Prepare the Required Documents
Filing for bankruptcy is also a paper-intensive process. Fortunately, if you have an attorney, he/she can help you gather and compile all the required documents, ensuring your bankruptcy filing is timely and accurate.
- File Your Petition
After compiling all the necessary documents and evidence, your attorney will file your bankruptcy petition online. Then, the court will issue an automatic stay, which halts all your creditors’ debt collection efforts.
- Notify Your Creditors About the Petition
Your attorney can help you notify your creditors and lenders about the filing by providing them with a court notice. Doing that is crucial because it helps lessen any risk of illegal foreclosure attempts by your lenders.
- Attend the 341 Meeting or Hearing
Before the court grants your bankruptcy petition, it will require you to attend the 341 meeting, also known as the creditors' meeting. Your presence at this hearing is vital, as you will be answering certain questions under oath. Your attorney will help you prepare adequately for potential questions, increasing your odds of securing a favorable outcome.
- The Court Will Confirm the Repayment Plan
For Chapter 13, your attorney can work with the bankruptcy court judge to confirm the proposed repayment plan and whether it is feasible.
Mistakes to Avoid When Facing Foreclosure
If your home is at risk of foreclosure due to debts, the pressure from your creditors can make you rush decisions, which could compromise your odds of saving the home. Below are common missteps many people make during these challenging times, but they are avoidable:
- Failing to seek legal guidance on time — The foreclosure process moves quickly, and missing any vital deadline could eliminate or limit your debt relief options
- Filing incomplete paperwork— Omitting certain debts or failing to disclose your income changes could delay your bankruptcy process or make the court dismiss it
- Ignoring your creditors' notices — Relying on foreclosure “rescue” scams or failing to take your creditors' notices with the seriousness they deserve could cause irreversible consequences
Other Debt Relief Options to Consider if Filing for Bankruptcy Cannot Help Prevent Foreclosure
If you are ineligible or filing for bankruptcy is not a viable option, your attorney can help you explore other debt relief options that stop a foreclosure, such as:
Loan Reinstatement
As the name suggests, loan reinstatement involves catching up on any missed mortgage payments and any penalty or late fees. Loan reinstatement could work to your favor, especially if you had a temporary financial problem and now comfortably resume your mortgage payments.
Mortgage Modification
Your creditors may stop foreclosure when you apply for a mortgage modification. Mortgage modification involves negotiating with your creditors and lenders to change the terms of your loan payments to make them more affordable and easier to pay off.
Mortgage modification could be an excellent debt relief option if you are experiencing long-term financial problems and cannot afford to keep up with your mortgage payments.
Like bankruptcy filing, each of these debt options has its merits and demerits. Hence, you should carefully review your unique financial situation and circumstances before choosing an appropriate course of action to stop the foreclosure.
Find a Licensed Bankruptcy Attorney Near Me
Filing for bankruptcy could work in your favor to prevent foreclosure and buy you time to fix and regain control of your finances. At Sacramento Bankruptcy Lawyer, we can review your unique financial situation and help determine whether filing for bankruptcy would help you achieve a fresh financial start.
Call us at 916-800-7690 if you need legal guidance or representation to stop foreclosure through bankruptcy. While there is no assurance that filing for bankruptcy will help you keep a home, it can help delay the foreclosure process.
