If you are facing foreclosure and cannot either short sale your home or agree on a loan modification, bankruptcy may help.
The Automatic Stay: Delaying Foreclosure
When you file either a Chapter 13 or Chapter 7 bankruptcy, what is called the automatic stay springs into effect. The automatic stay immediately requires your creditors to cease their collection activities immediately, no excuses. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending–typically for three to four months. However, there are two exceptions to this general rule:
Motion For Relief From The Automatic Stay. If the lender obtains the bankruptcy court’s permission to proceed with the sale (by filing a “motion to lift the stay”), you may not get the full three to four months. But even then, the bankruptcy will typically postpone the sale by at least two months, or even more if the lender is slow in pursuing the motion to lift the automatic stay.
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 (or a motion to lift the stay can be filed). For example, before selling a home in Nevada , a lender has to give the owner at least three months’ notice. If you receive a three-month notice of default, and then file for bankruptcy after two months have passed, the three-month period would elapse after you’d been in bankruptcy for only one month. At that time the lender could file a motion to lift the stay and ask the court for permission to schedule the foreclosure sale.
Also, and very important, the automatic stay is IMMEDIATE. So, for example, say a foreclosure sale is scheduled for 10:00 a,m, January 31, 2010. If the homeowner files for bankruptcy at 9:59 a.m. the foreclosure sale is null and void, or in simpler terms, you keep your house and the lender must re-foreclose after submitng the Motion For Relief From The Automatic Stay.
How Chapter 13 Bankruptcy Can Help
If you’re behind on your mortgage payments with no feasible way to get current, the only way to keep your home is to file a Chapter 13 bankruptcy.
Unlike Chapter 7, Chapter 13 bankruptcy lets you pay off the “arrearage” (late, unpaid payments) over the length of a repayment plan you propose–five years in some cases. Assuming you make all the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home.
Also, unlike Chapter 7. Chapter 13 may also eliminate the payments on your second and/or third mortgage.
How Chapter 7 Bankruptcy Can Help
The situation migt be that you will have to give u your home no matter what. In that case, filing for Chapter 7 bankruptcy will at least stall the sale and give you two or three more months to work things out with your lender. Options include a Short Sale.
Saving money. During a Chapter 7 bankruptcy, you can live in your home for free during at least some of the months while your bankruptcy is pending–and perhaps several more after your case is closed. You can then use that money to help secure new shelter.
Canceling debt. Chapter 7 bankruptcy will also cancel all the debt that is secured by your home, including the mortgage, as well as any second mortgages and home equity loans. So, if you were to obtain a Short Sale you do NOT have to worry about any deficiency amounts.
Chapter 7 Will Not Cancel the Foreclosure
With all this debt being cancelled, you may be wondering why the foreclosure on your home won’t be cancelled too. The trouble is, when you bought your home you probably signed two documents (at least)–a promissory note to repay the mortgage loan, and a security agreement that could be recorded as a lien to enforce performance on the promissory note.
Chapter 7 bankruptcy gets rid of your personal liability under the promissory note, but it doesn’t remove the lien. That’s the way Chapter 7 works. It gets rid of debt but not liens–you’ll still probably have to give up the house under the lien since that’s what provided collateral for the loan.
