Are considering declaring bankruptcy during a home foreclosure? If so, read on and get informed.
When it’s time to face foreclosure
Facing foreclosure is a very stressful time. Whether because of a temporary or on-going financial crisis, most homeowners work diligently to try and save their homes.
Unfortunately, in many cases the mortgage holder will play “hard ball” and refuse to cooperate with the borrower.
Sometimes this is due to attitude, other times incompetency, and at times it’s a combination of both.
Is bankruptcy the best last option?
When attempts at debt consolidation or settlement won’t work, bankruptcy is the last best option when you’re facing foreclosure. Why? Because bankruptcy gives a homeowner time to either restructure family finances and keep the home, or walk away and discharge their debts for good.
Bankruptcy gives you time to breath
Filing personal bankruptcy in New London or anywhere in Connecticut for that matter, gives the debtor an opportunity to develop a plan for his or her future finances.
The automatic stay provisions of the Bankruptcy Code take effect immediately once the case is filed. The automatic stay is a court injunction prohibiting creditors from taking collection actions against you.
The stay is “automatic” and does not require a judge’s signature or approval. When my clients hear about the automatic stay, they’re usually quite relieved.
Like a governor pardoning a condemned prisoner, the automatic stay stops a foreclosure action even at the twelfth hour.
While the automatic stay is in effect, the lender cannot sell your home unless it first receives permission from the bankruptcy court. A notice and an opportunity for a hearing before a bankruptcy judge are required before the automatic stay protection can be lifted.
Restructure and keep your home
Once the bankruptcy case is filed, the homeowner/debtor must decide whether to keep the property or walk away. Keeping a home that is in foreclosure means making arrangements to pay the arrears.
Let’s Make A Deal with Chapter 7
In some cases a deal is possible through a Chapter 7 bankruptcy case and the reaffirmation of the mortgage debt.
A reaffirmation is an agreement between the debtor and the creditor that is approved by the bankruptcy court.
It continues an otherwise dischargeable debt after the bankruptcy. During the reaffirmation negotiations, the parties may agree to different terms.
For instance, if the debtor is behind three months in mortgage payments, the creditor may agree to extend the note for three years, or may agree to accept a higher monthly payment over the remaining term.
Chapter 7 also can help a debtor afford to pay an arrearage and future monthly payments. Since the debtor is no longer paying unsecured debts that will be discharged in the Chapter 7 bankruptcy, there is more money available to catch-up the mortgage and pay the future payments.
Chapter 13 and foreclosure
While it is possible to negotiate new terms during a Chapter 7 bankruptcy, most debtors elect to file under Chapter 13 to cure a mortgage arrears.
In Chapter 13 a creditor is forced to accept payments on the arrearage amount over three to five years. During the bankruptcy the debtor must continue to make his future monthly mortgage payments on time.
Chapter 13 is also useful to strip away an underwater second mortgage or judicial lien. If the junior lien is completely unsecured, the bankruptcy court can strip off the lien.
The debtor must complete the Chapter 13 bankruptcy and receive a discharge for lien stripping to be effective and final.
“Completely unsecured” means that the value of the home is less than or equal to all senior mortgages. If the junior mortgage is secured by $1.00 of the property’s value, then the debt is considered “partially secured” and lien stripping is not available.
Or you can walk away
For a debtor who desires to walk away from a house in foreclosure, Chapter 7 may be the best option. A Chapter 7 is an erase-your-debts-and-start-fresh bankruptcy. A Chapter 7 debtor receives a discharge in about four or five months rather than three to five years in a Chapter 13 bankruptcy.
A debtor in a Chapter 7 bankruptcy case receives the benefit of the automatic stay, which will stop the foreclosure on a property until either the court grants the creditor relief from the stay or until the debtor receives his or her discharge.
Generally, a Chapter 7 debtor who is surrendering a house has between three and five months before the stay is lifted.
The creditor must typically start the foreclosure process from scratch after the bankruptcy, which can provide extra time for the debtor to move out. This is not always the most ideal option but sometimes most necessary.
Once the property is surrendered and the mortgage holder takes possession, the debtor will not owe anything more or have any additional responsibilities to the property. However, until the time that the property is transferred (either by deed transfer or by foreclosure), the property still belongs to the debtor.
Bankruptcy alone is not enough to transfer title of the property back to the creditor.
Consequently, the debtor must continue to safeguard the property, including mowing the lawn and protecting it from vandalism.
Damage to or injury on the property after bankruptcy is the responsibility of the property owner so make sure to keep up with the general household duties. Debtors are also advised to maintain insurance on the property until it is transferred because one never knows what problems can arise.
The choice is yours
Your best option is to speak with your attorney before you make any decisions. Doing so will allow you to gather all the information you need and give attention to your options.