Bankruptcy?... Can It Benefit Foreclosure?

Avoid or delay foreclosure of your home by seeking bankruptcy protection.

If you are facing foreclosure and cannot work out a deal or other alternatives measures with the lender, bankruptcy may help.

In previous posts, we have discussed the foreclosure process along with short sales...the pros & cons...the pitfalls. What alternatives are there if you cannot work out an effective modification plan for your loan and you have exhausted other alternatives, but still want to stay in your home?

Bankruptcy should be considered. Here are some ways it can help...

When someone files Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order called the "Order for Relief". This order includes something called an "Automatic Stay". This alerts all creditors that they are to stop all collection activities immediately. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending. Typically this is about 3-4 months.

There can be two exceptions to this rule...

"Motion to Lift the Stay"...The lender obtains the bankruptcy court's permission to proceed with the sale...you may not get the full three to four months. Even if this occurs, there will still be some lag time, depending on how fast the process moves along.

"Foreclosure Notice Already filed"...Unfortunately, bankruptcy's automatic stay won't stop the clock on the advance notice that most states require before a foreclosure sale can be held. For example, if you received a three month notice of default, then file for bankruptcy protection two months later, the three-month period would elapse after you'd been in bankruptcy for only one month. At that time, the lender could file motion to lift the stay and ask the court for permission to schedule the foreclosure sale.

The Two Types Of Bankruptcy...Chapter 13 & Chapter 7...

Primary residential real estate, for many individuals, is their only source of permanent security, and they will do whatever it take to stay in their house. If an individual is behind on their payments with no feasible way to get current, the only way to keep your home is to file a Chapter 13 bankruptcy.

Chapter 13 lets you become current on mortgage payments in the rears over a length of time on a payment plan that you propose...sometimes up to five years! However you must have enough income to remain current on your mortgage while making the "arrears" payments. Chapter 13 often makes it possible to eliminate 2nd & 3rd mortgages completely. When the market drops to the point that your 1st mortgage balance is more than the value of the home, then a bankruptcy judge can "strip" away the 2nd & 3rd mortages as they become "unsecured" at that point.

Chapter 7 basically eliminates all debt. In this case, you will lose your home, but if you are in such dire straits that this becomes necessary, then there are some positive aspects to discuss...
when you file for Chapter 7 protection, the foreclosure sale will be stalled for at least 3 months. This will give you time to save up some money, as all debts are absolved and typically you can stay in your house for at least three months without any payments. It not only cancels all non-scured debt, but it also cancels your 1st mortgage, as well as any 2nd or 3rd mortgages.

Thanks to a new law, you no longer face tax liability for losses your mortage or home-improvement lenders incurs as a result of your default, whether you file bankruptcy or not...this new law applies to the 2007 tax year and the following two years. This law does not shield you from tax liability for losses the lender incurs after the foreclosure sale if:

1.] The loan is not a mortgage or was not used for home improvements...
2.] The mortgage or home equity loan is secured by property other than your principal residence. However chapter 7 bankruptcy will exempt you from tax liability on losses the lender incurs if you default on these other loans.