If you are facing foreclosure, should you consider bankruptcy protection? Depending on your circumstances and after consulting with a bankruptcy attorney, a bankruptcy could prevent a foreclosure and allow you to remain in your home.
Can a Bankruptcy Save My House?
Before fling a Chapter 13, you need to qualify. You must have sufficient income to pay your debts and necessary living expenses, including making your monthly mortgage payments. A Chapter 13 allows you to repay your creditors and to make up the arrearages on your mortgage over a 36-month or 60-month plan.
You also cannot have secured debts totaling more than $1,149,525.00, or unsecured debt that exceeds $383,175.00. Secured debt includes mortgages and car loans. Most debtors are able to meet these limitations unless you have valuable real estate such as a homestead in certain areas of the country or an expensive second or vacation home that is in danger of foreclosure.
A Chapter 13 bankruptcy could also get strip junior liens or subsequent mortgages at the expiration of the plan as unsecured debt if the amount of your first mortgage exceeds your home’s value. In this case, any second or third mortgages are merely unsecured debt.
What Happens in a Foreclosure?
For some people, a bankruptcy may not be of benefit because they do not qualify under the income or debt limit requirements or other factors may present problems. Depending on your state and the provisions in your mortgage or deed of trust, your lender may use judicial or nonjudicial foreclosure to take your house and sell it at auction.
A judicial foreclosure uses the court process wherein your lender serves you with a Summons and Complaint and files a Notice of Lis Pendens, which advises the public that a foreclosure is pending. If you fail to file an answer, you face a default judgment. You may not have a redemption period and the lender can pursue a deficiency judgment against you for the unpaid portion of the loan after the sale unless your state has outlawed this remedy.
In a nonjudicial foreclosure, your lender must publish notice of the intent to foreclose and to sell your home at an auction, typically held at the courthouse. You may have an opportunity to redeem the loan or to reinstate it by paying it off in a certain time before the sale. There are different requirements for these two foreclosure proceedings depending on your state. You should consult a foreclosure attorney regarding which process your lender may use and to discuss your legal options.
Some foreclosures can take many months or even years to complete. This can give you an opportunity to negotiate with your lender for a reduction in the loan’s principal or interest rate or to explore loan modification programs. Other options are short sales or for the lender to take a deed in lieu of foreclosure. These can save you from being liable for most or all the personal indebtedness associated with the defaulting loan and save you from having a foreclosure on your credit record.