An option to stop a foreclosure is to file for bankruptcy. Taking this step could automatically delay or stop a foreclosure that may be in process, and it could also reduce your other unpaid debts, if not cancel them. It will allow you to repay your home loan over a longer period of time. Granted taking this step will hurt your credit scores, however you will be able to rebuild your credit scores faster if you have a clean slate to work from.
While the foreclosure process will typically be initiated by your lender only after you fall behind on your payments for at least two months (or usually longer, such as three or four months), during this timeframe you need to review all your options. The 2-4 month window of time provides you an opportunity to try some alternate measures to save your home, such as a short sale, loan forbearance, federal government program such as HAMP, or possibly even a deed in lieu of foreclosure.
After you have tried and not have had success with any of these different options, it may be the time to consider filing for bankruptcy as a possibility for stopping or delaying the foreclosure. Below are some details on what this option involves. Filing for bankruptcy should generally be one of your last options, and should only be done after you have explored and/or applied for all other assistance.
If you do go ahead and file either a Chapter 7 or Chapter 13 bankruptcy, the court will automatically issue an order that is known as the Order for Relief. This creates what is known as an "automatic stay." This will force your lenders and creditors to immediately stop their collection activities. So what this means for a foreclosure is that if your home is currently scheduled for a foreclosure sale, or if that date is approaching, the sale of your home will be legally postponed while the bankruptcy filing is pending. The delay can last from 3-4 months. However, be aware of two possible exceptions.
Exception number one is motion to lift the stay. If the bank or lender obtains the bankruptcy court's permission to go ahead with the sell of the home (which can happen by filing a "motion to lift the stay"), it is possible that you may not get a full delay in the process of three to four months. But even in these cases, the bankruptcy court judge will often still postpone the sale of your home by at least two months. Sometimes the delay can even be longer than the two months if the creditor is slow in pursuing the motion that would in effect lift the automatic stay filing. So no matter what happens, in almost all cases the homeowner will have at least a couple months, if not longer, to continue to live in the home and explore other options.
Second is if the foreclosure notice is already filed. There is another exception for when a bankruptcy court’s “automatic stay” won't stop the clock. More and more states are now requiring that an advance notice be filed before a foreclosure sale can proceed, and your lender can sometimes file to “lift the stay”. While this may sound complicated, it isn’t. To provide an example, say a homeowner in California is behind on their mortgage payments. Their bank or lender needs to give the homeowner at least three months' notice of a foreclosure filing according to state law. Say you receive that three-month notice of default, and then say for example you file for bankruptcy after two of the months have passed. In this case, the three-month period would end after you have been in the bankruptcy stages for only one month. So after that time the bank or lender could file a motion to lift the stay and they could then proceed to ask the court for permission to schedule the home, and they can go thru the foreclosure sale.
If you have tried all other options, such as state mortgage assistance programs, loan modifications, short sales, and more with no luck, the only other way to keep your home and stop a foreclosure is to file a Chapter 13 bankruptcy.
How does chapter 13 work. What it does is it lets you pay off the "arrearage" on your loan (which is late, unpaid mortgage payments) over the length of a repayment plan that you will be able to propose. It can be as long as five years in certain cases. However, the court will require that you have enough income to at least continue to pay your current monthly mortgage payment at the same time that you have agreed to pay off the arrearage. So this buys you time. If you agree to a plan with your lender, and you make all the required mortgage payments up to the end of the agreed upon repayment plan, you will then prevent a foreclosure and you will be able to keep your home.
In addition, a Chapter 13 bankruptcy filing may also allow you to eliminate the payments you were previously required to make on your second or third mortgage. The reason being if your first mortgage is now secured by the entire value of your home you probably do not have any equity left in the home (as many home values have dropped) with which to secure the later mortgages. Therefore, chapter 13 will get rid of your second or third mortgages.
Chapter 7 cancels debt. Also, a chapter 7 bankruptcy filing will also cancel all the unpaid debt that is secured by your home. Everything is canceled, including the mortgage, home equity loans, secured loans, and even second or third mortgages.
How to file a chapter 7 bankruptcy. There are a few different methods. You want to speak to a non-profit, HUD certified credit counseling agency for free advice on the process. Click here to learn more and find some nation non-profits.
While it does cancel your debt per above, the foreclosure will not be stopped. Why this happens is because when you purchased your home you more than likely signed at least three documents with your lender. Two of them would have included a promissory note that stated you promise to repay the entire mortgage, and a second document which is known as a security agreement. This more than likely would have been recorded as a lien which ensures you follow the promissory note and agree to its terms.
So, what in effect happens is that a chapter 7 bankruptcy filing will get rid of your personal liability under the promissory note, however it does not remove the lien. So a chapter 7 bankruptcy filing in effect gets rid of all of your unpaid debt and loans, but not any liens associated with them. So you will probably still have to give up the house after you have gone through the foreclosure process.
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