Facing Foreclosure: Chapter 13 Bankruptcy Can Help

No one likes to think about losing their home to foreclosure. It’s a scary time - not only are you looking at the possibility of losing your home and having your family displaced, but foreclosure can also be financially disastrous. Aside from the damage to your credit, it also wipes out any value you have paid into the house such as your down payment and monthly mortgage payments. If you’re facing foreclosure, filing for Chapter 13 bankruptcy can help you avoid foreclosure and maybe even keep your home.

The Basics of Chapter 13 Bankruptcy

Chapter 13 is one of two types of bankruptcy available to consumers. The other type, Chapter 7 bankruptcy, is referred to as a “total liquidation” and almost always results in the loss of the home. Chapter 13 is essentially a payment plan approved by all of your creditors and administered by the bankruptcy court. As part of the payment plan, you can elect to keep certain assets, such as your home, provided that you will pay any current delinquency and stay current on future payments. In order to qualify, you will have to submit extensive financial disclosures that detail all of your debts and sources of income.

The moment you file for bankruptcy the “automatic stay” goes into effect. Basically, this is a court order halting all collection efforts, including foreclosure actions. It’s one of the principal benefits of filing for bankruptcy. If you wait until after the foreclosure to file for bankruptcy, you won’t be able to get your home back.

The payment plan can take up to five years and may pay all of your debts or only a portion of certain claims. When you have successfully completed your payment plan, the bankruptcy case ends and you are awarded your “discharge.” The discharge is a court order that states that you no longer owe any remaining debts that came due prior to the date you filed for bankruptcy. In essence, the discharge gives you a fresh start.

Buying Time

We can’t overemphasize the importance of the automatic stay. Instead of paying off your creditors to avoid judgments, repossessions, or foreclosure, you now have time to sort out your finances, figure out your priorities, and plan accordingly. For people facing foreclosure, this usually means exploring some of the many options that may be available to avoid foreclosure.

• Refinancing your mortgage. Some people are able to refinance their homes in order to get a more affordable mortgage. Because the application process can be lengthy, filing for bankruptcy gives you the time you need in order to qualify for the loan, complete the application, and get a new mortgage.
• Loan modification. Similar to refinancing your mortgage, you may qualify for a program that allows you to modify your mortgage terms. This process can be even longer than a traditional refinance, so again, filing for bankruptcy can give you the time you need to work through the process.

Giving Up Your Home

Ultimately, you may not want to keep your home, but you don’t want to lose it to foreclosure. Bankruptcy can give you the time you need to pursue other options:

• Traditional sale. Maybe you’ve been thinking about selling your house simply because you can’t afford it. Selling a house is a huge undertaking and life gets in the way. Now you’re faced with losing everything you’ve paid into it. Bankruptcy gives you some breathing room to get the property ready for sale, list it, and then sell it in order to recoup at least some of your investment.
• Short sale. A short sale is when you sell the property for less than what is owed. Again, this takes time and requires approval by your mortgage holder. Bankruptcy not only gives you the time you need to work through the process but may also give you some additional leverage - many lenders would rather you sell the property at a loss than deal with the bankruptcy and a possible foreclosure.
• Deed in Lieu of Foreclosure. This is a process where you basically sign over the property to the bank. This is very similar to a normal foreclosure, but gives you some control over the situation and may be less damaging to your credit.

Keeping Your Home

Some people can manage to keep their home as a result of their Chapter 13 bankruptcy case. In this scenario, you’re going to have to bring the mortgage current through your payment plan and stay current on the subsequent mortgage payments as they come due. Thanks to bankruptcy, this option becomes more feasible because you no longer have other creditors hounding you.

Contact a Minnesota Bankruptcy Attorney

Avoiding foreclosure can be quite complicated. The first step is determining whether or not Chapter 13 is an option for you or whether some other option makes more sense. Then you need to determine whether you should keep the home or what other options may be available to you. Many people try to hold on to their home when they shouldn’t, which can be just as problematic as simply letting it go to foreclosure.

The Minnesota bankruptcy attorneys at Kain & Scott can help you sort through all of these issues. Formed in 1972, we have the experience you need to get through this difficult time and work towards a better future. If you’d like a free consultation, call us at 800-551-3292 or send us an email.