One of the key benefits of bankruptcy is that it "stays," or temporarily puts a halt to, all collections activities. This includes being dunned by collections agencies or being sued by creditors. More to the point, it also stops foreclosure, since foreclosure is a way that creditors collect on a debt. Once you file they can no longer foreclose--which means that even if they had initiated or begun foreclosure proceedings, they will have to come to a halt at that point.
Limitations on Using Bankruptcy
However, as useful as bankruptcy is, it's not all powerful. The two main limitations:
- It stops collections, but doesn't reverse them. If the foreclosure sale of your investment property was already completed before you filed, filing will not get your property back.
- The stay is not permanent. Eventually, creditors will be able to foreclose. Fortunately, though, bankruptcy gives you some tools to deal with your investment property's lenders.
How to Reduce Your Investment Property's Mortgage
If you filed a Chapter 7 bankruptcy, you have to "affirm" (agree in writing to keep paying) any secured debts, such as mortgages; if you don't, the debt is discharged and the lender gets the property. However, the lender doesn't want the property--they want money. (If a lender wanted property, they would have just gone out and bought some!) This gives you leverage--you may be able to get the lender to reduce your principal, your monthly payments, or both in exchange for you affirming the debt.
If you filed Chapter 13, there's a procedure called "cram down" in which the Court restructures what you owe on secured debt (other than for a mortgage on your residence), reducing the amount you have to pay to a figure based on the property's then-current value, rather than on the remaining balance of the loan. If the property has gained value, this won't help you; though if the property gained value, you could sell it for a profit in order to improve your financial situation. If the value has declined, however, such as if you're underwater on a mortgage, this is a powerful tool.
How an Attorney Can Help
A lawyer can advise you on which type of bankruptcy to file; handle the mechanics of filing (and make sure it gets done properly and quickly, to halt foreclosure); negotiate with lenders; and help present your situation (and the value of your property) in the most favorable light possible.