Facing Foreclosure? Bankruptcy Can Help You Avoid or Delay Losing Your Home
Richard Fonfrias, J.D.
Chicago's Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
What Is Foreclosure?
When you get behind in your house payments, foreclosure is the legal process your mortgage lender uses to evict you from your home. Then the lender sells your home at auction in hopes of raising enough money to pay off your loan. This won't happen by surprise. You will receive several notices of the process as it progresses.
Lenders usually don't start foreclosure proceedings until you are several months behind in your payments. This allows you time to find a solution to the problem yourself, such as a short sale or a deed in lieu of foreclosure.
If, however, you have tried these measures without success, then it's time to speak with a bankruptcy lawyer. He will explain what bankruptcy can do to avoid or delay the foreclosure. If you are in the Chicago area, I invite you to call my Chicago law firm for further information on filing for bankruptcy in Illinois. Here are a number of ways bankruptcy could help you:
The Bankruptcy Court's Automatic Stay
The Court automatically issues an order that includes the "automatic stay" whenever you file a Chapter 7 or Chapter 13 Bankruptcy. This automatic stay orders creditors to stop all collection activities toward you immediately. If the foreclosure sale for your home is imminent, the court's order postpones the sale while your bankruptcy is pending, which is typically 3 or 4 months.
Chapter 13's Repayment Plan Bankruptcy Could Help You
First Mortgage Payment. Chapter 13 Bankruptcy allows you to pay off the house payments that are late and unpaid. In some cases, you have as long as 5 years to bring your account current. Your income will need to be high enough to pay your current mortgage payment and to bring your late payments current. If you make the required payments until the end of the plan, they the foreclosure is dismissed and you may keep your home.
Second & Third Mortgage Payments. Believe it or not, the Chapter 13 Bankruptcy could help you erase your second and third mortgages. Here's how: The security for your first mortgage is the house itself. The security for the second and third mortgages is also the house. But if your home has fallen in value, then your home may be worth about the same amount as the first mortgage.
This means the second and third mortgages are no longer secured by the real estate. This allows the bankruptcy court to strip these liens off your home because they have now become unsecured debt, much like credit cards. These unsecured debts plummet into last place in payment priorities, which means they may not have to be repaid at all.
Chapter 7's Liquidation Bankruptcy Could Help You
If you don't have the ability to bring your house payments current, then you might have to file a Chapter 7 Liquidation Bankruptcy. This filing will give you 2 or 3 months to work with your lender to try to reach a solution. During this time, you can save money and pay off debt that is secured by your home.
How You Save Money. While you're in Chapter 7, you can still live in your home for a few months without making payments. Then when the bankruptcy closes, you have some money saved to find a new place to live.
Cancels Debt. Your Chapter 7 Bankruptcy will erase the debt that your home secures. This includes all mortgages.
Erases Tax Liability for Some Loans. New legislation eliminates your tax liability for losses your mortgage lender sustains due to your default, regardless of whether you file bankruptcy. This new law has limitations, however. It will not protect you from tax liability for losses the mortgage lender incurs after the foreclosure sale (1) if the loan was not a mortgage or was not used to make home improvements, or (2) if the loan is not secured by your principal residence.
Here's Where Chapter 7 Helps. Your Chapter 7 Bankruptcy protects you from tax liability on losses the mortgage lender sustains if you default on these other loans.
In Chapter 7, the Foreclosure Still Stands
This is because when you bought your home, you signed not only a promissory note to repay the mortgage loan, but also a security agreement that the lender could record as a lien to enforce the promissory note. So Chapter 7 removes your personal liability on the note, but it won't erase the lien. This means you'll likely have to move from your home because it was collateral for the loan.
Chapter 7 Bankruptcy May Not Be a Good Choice For You
You could lose assets that you'd like to keep. A wedding ring is a good example. If the value of the ring exceeds the value of jewelry you can keep in a bankruptcy, the trustee could order you to give up the ring so it can be sold to satisfy your creditors.
You may not qualify. Under a 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, you may not file for Chapter 7 if your average gross income for the previous six months is greater than the state median income for a household of the same size. Also, you do not qualify for Chapter 7 Bankruptcy if your current income exceeds your living expenses and you have enough money to file a Chapter 13 repayment plan.
How Bankruptcy Affects Your Credit
If you're concerned about what a bankruptcy will do to your credit score, you should know that both a bankruptcy and a foreclosure will hurt your credit standing. However, when it comes to rebuilding your credit, bankruptcy could be the better option.
Foreclosure: A foreclosure will not erase any of your other debt. Your credit report will feel the hit for many years. Plus, if you are looking for a new home, a foreclosure on your credit report will hurt you a lot.
Bankruptcy: While a bankruptcy will hurt your credit score, it will leave you financially sound and free from debt. This is why it helps you rebuild your credit sooner than a foreclosure.
Bankruptcy as a Last Resort
If you know that you won't be able to make the payments in a Chapter 13 repayment plan... and if you know that a Chapter 7 Bankruptcy will delay the foreclosure for only a short period of time... then you should probably file for bankruptcy. True, you'll lose your home; however, you will also erase the obligations of your mortgage and your tax liability. Bankruptcy also gives you the opportunity to save money, which you can use when looking for a new place to live.
Talk With an Experienced Bankruptcy Lawyer Before You Do Anything
The information in this article is accurate, or at least as accurate as it can be in a general sense. Your situation might be a little different -- or you may not be able to erase certain debts that you now face. So don't take any chances.
Please contact me and I'll gladly discuss your financial situation without cost or obligation. Then I can help you make an intelligent decision so you get the fresh start that so many people with money problems want and need. I'll be happy to help you in every way.