After missing a few mortgage payments, borrowers should not be surprised when foreclosure documents arrive at their homes. Lenders are quick to initiate foreclosure proceedings when borrowers miss payments, but borrowers have options they can use to stop foreclosures from occurring. Bankruptcy is an option that works well for this situation. Here are several important things to understand about filing bankruptcy and foreclosure.
How Chapter 13 Bankruptcy Stops Foreclosure
People who consider filing bankruptcy have two main options to choose from. The first is Chapter 7, which is a branch of bankruptcy that helps eliminate unsecured debts. While it is possible to stop a foreclosure with Chapter 7, most people benefit more by using Chapter 13.
Chapter 13 is also a branch of bankruptcy, but it works very differently than Chapter 7 bankruptcy. Chapter 13 does not work to erase unsecured debts in most cases. It is designed for helping people repay their debts through a repayment plan.
When a person files for Chapter 13 after receiving foreclosure documents, the lender must stop all proceedings. The lender must agree to accept the repayment plan the court creates for the person, and the lender must agree to give the person up to five years to repay the debts.
Through Chapter 13, people can save all their assets if they make all the necessary payments in the bankruptcy estate. If a person makes all the payments during the repayment period, the loan will resume as normal when the repayment period ends.
Lien stripping is one other benefit offered through Chapter 13. Lien stripping removes second and third mortgages if a person owes more money on the house than what it is worth. These benefits are not available through Chapter 7 bankruptcy.
When Chapter 7 Bankruptcy Can Help
There are times when filing for Chapter 7 bankruptcy is helpful for people facing foreclosure; however, Chapter 7 itself does not permanently stop a foreclosure like Chapter 13 does. If a person's income is relatively low and they owe a lot of money on credit cards, then using Chapter 7 might work well for stopping a foreclosure. But there is one additional step the person must complete first.
Before a person files for Chapter 7 bankruptcy, he or she will need to go through a loan modification with the lender. A loan modification allows a person to keep his or her home by acquiring new terms for the loan. During a loan modification, the person and the lender must reach an agreement on these terms.
In many cases, lenders will drop the interest rate on the loans. When this happens, the monthly payments on the loan will drop. Lenders also offer an extension of loan times. For example, if the person owes 20 years of payments, the lender might extend this to 25 years. This extension also reduces the monthly payment.
Many lenders also erase past-due fees from the loan balances, or they might even remove some of the principle of the loan balance. The goal is to allow the borrower a chance to start over with payments that are more affordable for their budgets.
If a lender agrees to this adjustment, then the person could then file for Chapter 7 bankruptcy to eliminate other debts he or she has. However, bear in mind that loan modifications do not occur after people file Chapter 7 bankruptcy.
If you are facing foreclosure and do not know what to do, schedule a visit with Hickson Law, PC. We can help stop the foreclosure of your home so you take control of your finances. Call us today to learn more.