Can Chapter 13 Bankruptcy Stop Foreclosure?
In this section of Total Bankruptcy, you will learn about:
- the current foreclosure crisis;
- the specifics of mortgage foreclosure;
- how Chapter 13 bankruptcy can stop foreclosure;
- how Chapter 13 bankruptcy works; and
- who can file for Chapter 13 bankruptcy.
Foreclosure in the United States
Mortgage companies continue to foreclose on American homes at an alarming rate. The real estate market boomed in the late 1990's and early 2000's. Property values appreciated at an unprecedented rate and homeowners cashed in on their new found home equity. At the same time, a variety of "creative" mortgage options became available, options mortgage lenders said would allow people who might otherwise not have qualified for home financing to become homeowners.
Now, interest rates have climbed, and the real estate market has cooled. Homeowners with adjustable rate mortgages (ARMs) and interest-only loans are reaching the "shock point" and seeing payments increase dramatically, but prepayment penalties, rising interest rates, and declining home values make refinancing difficult-especially since these "creative" mortgage options have left most borrowers with little or no equity.
Unfortunately, many consumers simply don't know that Chapter 13 bankruptcy can stop foreclosure. For many people, the word "bankruptcy" brings to mind only the Chapter 7 liquidation, in which debts are discharged but non-exempt property can be sold for the benefit of creditors. However, Chapter 13 bankruptcy can be a very powerful mechanism to save your home if you have fallen behind on your mortgage payments and want to stop foreclosure.
What is Mortgage Foreclosure?
Foreclosure, in simplest terms, is the process by which the bank or mortgage company that has a lien on a piece of real property takes that property back because the borrower / property owner hasn't complied with the terms of the mortgage agreement. Most often, this is because the borrower has fallen behind on payments.
The exact foreclosure process differs somewhat from state to state, but the real problems usually begin when mortgage payments are 16 days past due. Although it is still possible to work out a repayment plan with the lender at that point, many homeowners do not. This may be because they're still in the midst of the financial difficulties that caused the past—payment, or simply because they're hoping things will get better with the next paycheck or the next month or some other change in circumstances.
Unfortunately, many people delay too long while hoping for things to get better. If a homeowner has significant equity (usually at lest 15 - 25%) in the home and is less than 90 days past due, there may be a variety of possible ways to stop foreclosure, including refinancing. However, once a loan is more than 90 days past due, or if the homeowner doesn't have significant equity-which is often the case due to creative financing options-refinancing can be difficult. In those cases, Chapter 13 bankruptcy may still allow the homeowner to stop foreclosure.
How Can Chapter 13 Bankruptcy Stop Foreclosure?
Many people file for Chapter 13 bankruptcy specifically to stop foreclosure. In most cases, an automatic stay is entered as soon as a Chapter 13 bankruptcy petition is filed. The automatic stay will temporarily stop foreclosure, along with all other collection action, regardless of the stage of the foreclosure proceedings. With the automatic stay in place, the debtor and his attorney have the breathing room to work out a Chapter 13 repayment plan.
How Does Chapter 13 Bankruptcy Work?
Within 15 days after filing a Chapter 13 bankruptcy petition, the debtor must file a proposed plan, setting forth his income, allowable living expenses, and proposed payments to the trustee for the benefit of creditors. Current payments must be kept current after the Chapter 13 bankruptcy petition is filed.
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Homeowners must make all mortgage payments that come due during the Chapter 13 bankruptcy repayment plan, and failure to make current payments on time may mean that the bankruptcy court lifts the automatic stay and allows the mortgage company to resume foreclosure proceedings. Assuming that all plan payments are made in a timely manner, the homeowner may catch up the past due mortgage payments over the 3-5 years of the repayment plan, or may discover that he is eligible to refinance the property after a period of repayment.
Who Can File for Chapter 13 Bankruptcy?
Generally, a homeowner can file a chapter 13 bankruptcy to stop a mortgage foreclosure if the homeowner:
- Is employed or has another regular source of income;
- Has sufficient income to make Chapter 13 plan payments as well as all current mortgage payments and living expenses; and
- Does not have debts in excess of the statutory caps for Chapter 13 bankruptcy.
A consumer bankruptcy attorney in your area can help you assess whether Chapter 13 bankruptcy is the right option for you, and can help you structure a repayment plan that works for you and your creditors. Get started by filling out our free bankruptcy case evaluation form or calling 1 (877) 349-1309, and we'll help you get in contact with a local bankruptcy attorney as soon as possible.