Filing for bankruptcy can provide a homeowner with a way to save their home from foreclosure. When a homeowner files for bankruptcy, an automatic stay is put into effect, which temporarily stops most collection actions, including foreclosure proceedings. This gives the homeowner time to catch up on their mortgage payments or to work out a plan to keep their home.
There are two main types of bankruptcy that can help homeowners save their home from foreclosure: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is known as a “liquidation” bankruptcy, which means that the debtor’s non-exempt assets may be sold to pay off creditors. However, some homeowners are able to keep their home in a Chapter 7 bankruptcy if they are current on their mortgage payments and their equity in the home is protected by the homestead exemption.
Chapter 13 bankruptcy is known as a “reorganization” bankruptcy and is designed for individuals with a regular income who are behind on their mortgage payments. Under Chapter 13, the homeowner is able to propose a plan to repay their creditors over a period of three to five years, during which time the automatic stay protects their home from foreclosure. At the end of the repayment period, any remaining unsecured debt is discharged.
It’s important for homeowners to understand that filing for bankruptcy is not a guarantee to save their home from foreclosure. They must continue to make their mortgage payments while the bankruptcy is pending, and they must also meet the requirements of their repayment plan in a Chapter 13 bankruptcy.
In addition, filing for bankruptcy may have a negative impact on the homeowner’s credit score, but the impact is often less severe than the impact of a foreclosure. Over time, as the homeowner begins to make timely payments and rebuild their credit, the negative impact on their credit score will lessen.
It’s also important for homeowners to work with an experienced bankruptcy attorney who can advise them on the best course of action for their specific financial situation. The attorney can review the homeowner’s financial situation and determine if filing for bankruptcy is the best option to save their home from foreclosure.
At Cornerstone Law Firm, our attorneys help clients navigate the complex world of bankruptcy and foreclosure, and can help you determine whether to reorganize debts, seek a modification, or consider bankruptcy. Call today for a free consultation with one of our attorneys.