A foreclosure typically starts after a home owner gets behind on mortgage payments. Before selling the house at auction, the lender must follow the process as defined in state law.
The lender uses the sales income toward the mortgage balance. Whether the lender can collect any remaining money from the borrower, known as a deficiency balance, will rely on the laws of the state in question. The method involves a few important legal steps, including notifying the homeowner.
The whole bankruptcy process doesn’t happen instantly, as the lender will not initiate the foreclosure process until the home owner has missed a few payments, such as at least 2 or 3. This time buffer provides the borrower the opportunity to find other options like loan forbearance, a brief sale, or a deed in lieu of foreclosure. A real estate and foreclosure legal expert can talk about all your options and rights in foreclosure.
When home owners have attempted these measures and not been successful, they need to consider whether bankruptcy can facilitate the avoidance of foreclosure, or at a minimum, afford you time to negotiate. of buy you a touch time. There are certain ways in which filing for bankruptcy can solve your mortgage debt issues.
Delay Foreclosure with an Automatic Stay
When a borrower files a Chapter 13 or Chapter 7 bankruptcy, the court will immediately issue an order, named the order for relief, that contains a provision called the “automatic stay.” The automatic stay insists that the borrower’s creditors stop any collection activities right away.
If a lender had scheduled a borrower’s home for a foreclosure sale, and then the borrower files for Chapter 7 bankruptcy, the sale will be legally postponed while the bankruptcy is in progress, which usually lasts around 3 or 4 months. The lender may also ask the bankruptcy court for permission to go ahead with the sale by filing a motion to lift the automatic stay. A borrower will not get the full three to four months if this motion is successful.
Another fact to consider is that the motion to be filed and heard needs a certain amount of time to complete, and as a result the bankruptcy filing will most likely postpone the sale by 2 months at a minimum, or longer if the lender delays pursuing the motion to lift the automatic stay. A good bankruptcy attorney can educate borrowers about all the details in the Automatic Stay process.
How Chapter 13 bankruptcy assists borrowers
The average person no doubt desires to remain in their home and are willing to do whatever is possible to remain in their home for indefinitely. For those home owners who are behind in mortgage payments with little possibility of getting caught up prior to foreclosure, the main method to maintain ownership of a house is to file a Chapter 13 bankruptcy.
Chapter 13 works very well to allow borrowers to pay off any arrearage, which are late or unpaid payments, over the length of a repayment plan of the borrower’s choosing. This plan typically consists of about five years in most cases. As a borrower, you will require a sufficient amount of income to satisfy the current mortgage payment as well as paying off the arrearage. Assuming borrowers successfully submit every required payment to fulfill the repayment plan, they can successfully avoid foreclosure and to retain the home.
Regarding 2nd and 3rd mortgage payments, Chapter 13 bankruptcy may additionally facilitate the cancelling the payments on these mortgages. How the process works is if a borrower’s mortgage is secured by the complete value of the home, which is feasible if the house has decreased in value, the borrower might not have enough equity in order to secure the later 2nd or 3rd mortgage mortgages. This situation permits the Chapter 13 court to strip off the later mortgages and re-assign them as unsecured debt. Under Chapter 13 bankruptcy, this will result in taking last priority and frequently doesn’t have to be paid back to the lender. As home equity rises, this method is employed less frequently.
The recent COVID recession has affected home owners’ equity severely, so as a result it is rare for a bankruptcy filer to have very much, if any, equity in a house. When home values inevitably will go back to climbing in values. A bankruptcy filer needs to prudently consider the goal of fully protecting the equity in the homestead exemption allowed by the state in question. If the homestead exemption isn’t enough to retain ownership in the home, the filer will need to pay the value of the nonexempt property in the repayment plan, as well.
How Chapter 7 bankruptcy protects your assets
Filing a chapter 7 bankruptcy is able to cancel all the debt secured by a borrower’s home, and mortgages and home equity loans. Chapter 7 goes a step beyond by forgiving a homeowner for tax liability for losses the mortgage and / or home-improvement lender assumes from the homeowner’s default on the mortgage. This tax law applies to the 2007, 2008, and 2009 tax years. However, the new tax law does not eliminate the homeowner’s tax liability for the lender’s losses at foreclosure if the loan is not a mortgage or was not used for home improvements, for example, such as a loan used to pay for a vacation or vehicle. The mortgage or home equity loan usually is secured by property other than your main residence, such as a vacation home or a rental property.
Some important caveats regarding Chapter 7
Even when a borrower files for chapter 7 bankruptcy protection, the borrower technically may still lose a house even if all the debt and tax liability forgiveness is given. Chapter 7 forgives a borrower’s debt, but that is all it actually does. When borrowers sign onto a mortgage, they are agreeing to use a property as a type of collateral in case one defaults on payments. Chapter 13 enables someone to stall any action on that lien while they catch up on the payments, so filing may save their home. Chapter 7 absolves a person’s debt, but it will not remove the lien or lift the foreclosure on a house. Therefore, a borrower could perhaps still lose the house.