Those who are facing foreclosure often consider the possibility of bankruptcy. Of course, when most people think of bankruptcy, they think of Chapter 7. They wrongly assume that their debts will be wiped out with a penalty on their credit report. While this does describe Chapter 7, there is another type of bankruptcy, Chapter 13, which is uniquely suited to managing “secured” debt (like a mortgage or a car loan).
In this article, we’ll discuss how to manage mortgage debt in bankruptcy.
Do You Want to Keep Your Home?
This is the first question that I ask my clients. If the answer is yes, then you have options. If the answer is no, you also have options. But the choices you make moving forward will be vastly different.
If you are looking to save your home from foreclosure, then you will likely want to file under Chapter 13. If not, then you’ll be looking at a Chapter 7 bankruptcy instead.
Understanding the Foreclosure Process
If you have defaulted on your mortgage payments, the lender will begin foreclosure. How the foreclosure works depends on the mortgage contract you signed. You will generally be given notice of the lender’s intent to foreclose and the lender will file the necessary paperwork with the court to force the sale of your home. Your home will be sold at an auction and you will face an additional charge of fees related to the foreclosure.
In Oregon, a bank cannot charge you for the deficiency balance (the difference between the price at which the home was auctioned and the amount you agreed to pay).
Chapter 7 Bankruptcy and Foreclosure
Chapter 7 is also known as liquidation bankruptcy. A bankruptcy trustee takes control of your estate and determines what assets you have that are worth selling off to repay your creditors. Usually, they find nothing and the case proceeds with a discharge of all your medical debt, credit card debt, and other unsecured debt (not backed by collateral).
While your equity in your home is protected up to a certain amount, you must remain current on your payments, cure any arrearages, and remain current on property taxes and homeowner’s association fees.
Since your mortgage payment is backed by your home, you cannot discharge it in Chapter 7. What you can discharge is the extraneous fees associated with the foreclosure process. Additionally, a Chapter 7 bankruptcy may buy you some additional time to cure an arrearage.
The Automatic Stay
Once you file for any kind of bankruptcy, all creditor actions against you must stop immediately. This includes foreclosure. However, if you file under Chapter 7, the lender can move to lift the automatic stay. In other words, you’re buying yourself less time than you would had you filed under Chapter 13.
Since Chapter 13 bankruptcy allows you to reorganize your debt, including your mortgage debt and car payments, the automatic stay from foreclosure will remain in effect for the entire life of your bankruptcy and so long as you continue to make payments, the bank will not be able to foreclose on your home once the bankruptcy is completed.
Chapter 13 Bankruptcy and Foreclosure
Chapter 13 is called reorganization bankruptcy because it reorganizes all of your debts into affordable monthly payments. In order to accomplish this, certain debts are given priority. The highest priority debts are priority secured debts. These include mortgage payments. In the process, it allows you to pay only a fraction or none of your unsecured debts. In some cases,
you may only be required to pay off some of your secured debts as well. We’ll talk more about that later.
How Chapter 13 Works with Mortgage Arrearage
Typically, a bank will begin the foreclosure process after one or two months of nonpayment. They will issue a notice of intent to foreclose and then start the foreclosure proceedings. If you file for Chapter 13, the foreclosure is stopped dead in its tracks and remains stopped while your bankruptcy is still active (over the course of three or five years).
Your bankruptcy attorney’s job is to present the court with a plan for repayment (with some of your debts stripped off). This repayment plan works within your finances. Those who intend to keep their home will be required to keep current on their mortgage payments, repay the arrearage (prorated over the life of the bankruptcy) while continuing to pay property taxes and other requirements stipulated in the mortgage contract.
Second Mortgages and HELOC Loans
If you’ve taken out a second mortgage against the equity on your home, a Chapter 13 bankruptcy can provide you with a valuable tool to prevent foreclosure. In many Chapter 13 bankruptcies, second mortgages and home equity lines of credit can be converted from a secured loan to an unsecured loan. Since unsecured debt is considered the lowest priority in Chapter 13, these loans can essentially be stripped off, meaning you won’t (necessarily) have to repay (all of) them. If you do, you will only have to repay a fraction of the loan value.
When Should I File for Bankruptcy?
Earlier is better. There are two major reasons for this.
● Tax debt survives bankruptcy – Any property tax debt that you have will survive the bankruptcy. If you’ve filed under Chapter 7, that debt will not be discharged without a hardship exemption and, in the meantime, you’re accruing taxes while you wait.
● No mortgage payments – While you’re in bankruptcy, which can take a considerable amount of time to work its way through the courts, your lender cannot collect mortgage payments. If you decide to file under Chapter 7, forgo your home, and move on with your life, you can save that money while you financially regroup. In Chapter 13, those payments will be rolled into your arrearage and repaid over the court of the bankruptcy.
Talk to a Eugene, OR Bankruptcy Attorney Today
Bankruptcy is a difficult decision for anyone to make and yet, more often than not, circumstances for the decision on us. If you’re facing foreclosure and need a way out, bankruptcy is one option at your disposal. At Butcher Law Office, LLC we work closely with our clients to determine their goals moving forward and come up with a plan of action that secures their best interests. Give us a call at 541.762.1967 and we’ll be happy to sit down and provide a free consultation.