Does Bankruptcy Stop Foreclosure?
Step by Step Guide
Many homeowners facing foreclosure today are searching for that saving grace that can help them keep their home. Most can’t seem to work it out with the bank, and they are too far behind to catch up. Bankruptcy looks like the last resort, but many homeowners don’t understand the process.
Does bankruptcy stop foreclosure? The short answer is yes. However, the better answer is do you qualify and can you complete everything required of you throughout the process.
First, you need to evaluate your present and future income and debt. Then you need to be open minded and embrace the changes that will need to be made. Prepare to educate yourself utilizing the resources this process offers; it will help you to better manage your finances. Keeping yourself out of debt and on track is the best way to avoid foreclosure.
Next, we will outline a comprehensive breakdown of all the steps you will need to take. Each section below will be divided into chronological order of importance. This guide will help you understand the entire bankruptcy process and compare it to your current situation.
Step 1
Try to negotiate with your lender
Negotiate with your lender
If you’ve fallen behind on your mortgage payments, the best thing to do is to contact your bank right away. There are a few steps you can take before you rush to filing bankruptcy.
Loan modification – you can ask for different terms for your loan. Try to extend the amortization period (life of the loan.) Making it longer will make your monthly payment go down or change the interest rate. Lastly, switch from an adjustable rate to a fixed rate.
Forbearance – it’s a temporary way to stall the foreclosure, but it can work in many instances. Forbearance allows you to either pay partial payments or no mortgage payments for a specified time agreed upon by you and the lender. However, eventually, you must pay the full amount forbore. You can choose to pay one lump sum to catch up on your mortgage or make extra payments in addition to your monthly mortgage payments.
Step 2
Seek alternative help
Seek alternative help
If your lender will not work with you nor allow for any extensions or concessions, then you may need to seek alternative help. There are a few additional steps you can take before you file bankruptcy.
Find a counselor – a lawyer can help you consolidate your debt, create a budget and assist you in getting your finances back on track. They will act as a mediator for you and your lender to find a compromise that works for both parties. They help exhaust all options before you file bankruptcy. However, you should be very careful and leery of people who make false promises because there is no guarantee using this method. Counselors can charge extremely high amounts, in some cases more than you owe.
Sell your home – as a homeowner, you have the right to sell your home at any time. This option won’t work if you have an underwater mortgage. Meaning you owe more than you could get selling. Some banks would consider a short sale, but there is no benefit to that if you want to keep the home or make some cash. The advantage of selling is if you have a chance to walk away with some money and avoid foreclosure. This will allow you to start over and avoid bankruptcy.
Step 3
Bankruptcy
File bankruptcy
If you’ve exhausted all your available channels and still find yourself facing foreclosure, then your next option is to file bankruptcy. Bankruptcy is the process of eliminating a portion of your debt in exchange for making regularly scheduled payments. It's the safest option for many homeowners with high debt and an underwater mortgage.
When you file for bankruptcy, the foreclosure proceedings can be stopped with an automatic stay. In addition to stopping foreclosure, it also stops interest accumulation on unsecured debt that will be paid in the bankruptcy plan.
Step 4
Bankruptcy lawyer
Hire a bankruptcy lawyer
For this step, you will need to research and meet with a few lawyers to hear what they have to say about your case. Never just go with the first lawyer without talking to another lawyer. You need to know your rights and understand this process. Doctor’s encourage second opinions, and it’s a good idea here too.
Once you’re comfortable with the attorney selected you can discuss and action plan and decide which bankruptcy you qualify for. Most people file Chapter 13 because they want to keep their home.
Step 5
Which bankruptcy to file?
Decide which bankruptcy to file
Chapter 13 – This is your best option if you want to stop foreclosure and keep your house. By paying your plan on time and your creditors outside the plan on time, you can slowly rebuild your credit. Chapter 13 takes your debt and creates a payback plan. It allows you to pay off your debts over a period. Most programs last 3-5 years, but you can pay it off earlier. The length of time and amount you pay per month will depend on your income and total debt owed.
Chapter 7 – If you want to keep your house then this is not the option for you. But if you want to buy some time and get rid of most of your debt, then this is the option. This type of bankruptcy hurts your credit the most. Chapter 7 takes majority or in some cases all your debt and gets it discharged by the court. By discharging your debts, the courts can take any non-exempt property and sell it. Then they distribute the proceeds to your creditors. With chapter 7, you won't be able to keep your house, but you will be able to stall the foreclosure for at least a couple of months
Step 6
File the petition
File the petition and follow the court ordered steps
The next several steps will be at the start of your bankruptcy and last the duration of your bankruptcy. Your attorney will advise you of all the motions to be filed, court dates, paperwork needed and payment schedule. Below is just a quick summary of a few things you will be asked to do and follow.
Get your proof of income and tax returns together
Maintain regular payments on time with your creditors for future payments due
Take credit counseling classes and budget planning classes
Don’t buy anything new or secure additional credit without permission from Trustee
Don’t miss a scheduled payment in your bankruptcy plan
Bottom Line
There are never any guarantees when it comes to stopping foreclosure. However, filing bankruptcy has a proven track record for success and can halt the process dead in its track with an automatic stay. Be sure to exhaust all your resources before filing, and if you want to keep your home, then you need to file chapter 13.
Do your due diligence before signing with just any lawyer and make sure you understand what you’re signing up for. Bankruptcy is a viable tool that homeowners can use if they hit a rough patch and need help keeping their home.
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