How Bankruptcy Can Help Save a Home from Foreclosure

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During the sub-prime mortgage boom, many homeowners were sold home loans that they could not realistically afford. Now, these mortgages are adjusting to more conventional types, and homeowners are suffering with mortgage payments that are simply unmanageable.

While the government has been pressuring banks and other lenders to be "more lenient" with regards to home loan modification, most of these lenders are reluctant to do so. Instead, they are filing foreclosure lawsuits to evict the homeowners, sell the home at a loss, and then file a deficiency judgment against the borrower for the difference.

Petitioning for Bankruptcy Protection Stops Foreclosure

Once a bankruptcy petition has been filed, an automatic stay goes into effect which instantly stops the foreclosure process, as long as the home hasn't already been sold. Once the Sheriff's auction has taken place, then the foreclosure cannot be reversed.

While the petition itself does not eliminate past due mortgage payments, it gives the homeowner and their bankruptcy attorney time to work out an option, using the bankruptcy courts as protection from the lending bank.

Two Options Under US Bankruptcy Law

Chapter 7

filing for chapter 7 bankruptcy will eliminate all unsecured debts, such as credit cards and personal loans, and offers homeowners a way to keep their home. While a chapter 7 bankruptcy means some personal property will be sold off to repay creditors, a primary residence is "exempt" from this liquidation and will be kept by the homeowner.

This type of bankruptcy is best for people who have little or no income.

Chapter 13

A chapter 13 bankruptcy is better suited for those homeowners who have some income, but not enough to repay debts and stay on top of mortgage payments. Chapter 13 offers some unique advantages for homeowners facing foreclosure.

Unlike traditional loan modification, chapter 13 includes a repayment plan constructed by the homeowners bankruptcy attorney which includes a way to catch up on delinquent mortgage payments as well as other secured debts.

Unsecured debts are usually included in a chapter 13 repayment plan, but are usually repaid for pennies on the dollar.

How to Keep the House

Depending on the type of bankruptcy that is chosen, the home will be treated in different ways. Under a chapter 13 bankruptcy, the mortgage payment as well as past due mortgage payments will be included in the repayment plan. This repayment plan usually takes three to five years and is structured in such a way that the homeowner will be able to stay "above water".

Under a chapter 7 bankruptcy, the situation is a bit different. While the foreclosure will be "stayed", it may continue a few months later. However, a bankruptcy attorney should be able to use the complicated bankruptcy laws as leverage to force the lender into creating a reasonable loan that the homeowner can afford.