Bankruptcy is an extremely useful tool when encountering a foreclosure on real property. As part of my practice, I do foreclosure defense. In many cases, bankruptcy is a fall-back option should my clients be unable to obtain a timely mortgage modification. Sometimes we choose bankruptcy first to stop a foreclosure, rather than alternative options that fall under the spectrum of foreclosure defense. This article discusses how bankruptcy may stop a foreclosure and when filing a chapter 13 bankruptcy is appropriate when facing a foreclosure action against your home.
The first question I ask when clients are facing a foreclosure, though, is: What is your objective with your home? Are you trying to save your home, or looking at walking away from your home with the least amount of liability exposure? If clients are looking at saving their home, we move on to a discussion about the benefits of a chapter 13 bankruptcy.
Chapter 13 bankruptcy allows a client to stop immediately a foreclosure action. As soon as we file a chapter 13 bankruptcy, we will provide the opposing party (the bank) and the court handling the foreclosure case with notice of the chapter 13 bankruptcy filing. After stopping the foreclosure action with the bankruptcy filing, we propose a plan in which the arrears on the mortgage can be paid over 3-5 years. Now, as soon as we file a chapter 13 bankruptcy, current payments on the mortgage will need to be made going forward; otherwise, the bank can move the court for relief from the bankruptcy in order to foreclose on the property.
An Example of How A Chapter 13 Bankruptcy Can Stop a Foreclosure & Save a Home:
Let’s say Ted, a consumer, loses his job and cannot make his mortgage payment for 1 year ($1,100 mortgage payment x 12 months = $13,200). The bank who holds the mortgage initiates a foreclosure proceeding, and Ted comes to see me. (Fortunately, Ted has found a new job and can make current mortgage payments going forward.) We are able to file a chapter 13 bankruptcy and immediately stop the foreclosure. We are also able to place the arrears (the 1 year missed payments on the mortgage, or $13,200) into the bankruptcy to be paid over 3 to 5 years. Now, Ted must start making his current monthly mortgage payment, and for the next 3 to 5 years, he can pay down on the mortgage arrears (or $13,200) through the bankruptcy. Ted has successfully saved his home from foreclosure.
A chapter 7 bankruptcy, or liquidation bankruptcy, may disrupt a foreclosure proceeding, but does not have the tools necessary (such as a chapter 13 bankruptcy) to cure the mortgage arrears over time.
If you are facing a foreclosure and would like to learn more about how a chapter 13 bankruptcy filing may stop the foreclosure, please call today to set up your free in-office bankruptcy consultation.