With the housing slump more and more people are finding themselves facing foreclosure. Once that notice has been received, it can be easy to panic. Some lenders may work with you to modify the loan or short sale your home so at least you are out from under the debt. The unfortunate truth is that most will not and receiving a foreclosure notice can feel like the end of the world.
One option, particularly if you have other debt, is to file for Chapter 13 bankruptcy. The second you do so, an automatic stay is placed on the foreclosure until the bankruptcy is completed, which usually takes three to four months. This can, at the very least, give you time to find other accommodation. The lender may file a motion to lift the stay and if it is granted, the foreclosure will continue. Filing will also stop any other actions by creditors, such as attempts to repossess your car.
Once you file, you will work with the court to come up with a repayment plan that will allow you to pay off your debts over as long as five years. You do, however, still have to make your regular payments, so if you are unable to afford them now, you will not be able to afford them under the plan. Primarily, the plan will allow you to pay back the arrears in more reasonable chunks. It will also not prevent a variable rate mortgage from going up. You should still consider whether you can afford to stay in your home. You may pay your current payments either directly to the bank as normal or to the trustee managing your payment plan. Paying to the lender is better as it reduces the trustee’s fees.
Another advantage of chapter 13 is that you may be able to strip off additional mortgages if your home is worth less than the amount you owe. These will become unsecured loans that you can pay off through the plan – often at much more favorable terms. To take advantage of this make sure to get your home independently appraised before you file. It requires that the entire second (or third) mortgage or home equity loan is no longer covered by equity, not just part of it. You need to file a specific motion to strip the liens, or to talk about it when establishing the repayment plan. Be aware that your creditor is likely to object and the judge may rule against you.
As an aside, if you file Chapter 7 bankruptcy you are much less likely to be able to keep your home. Courts generally lift the stay on foreclosure in Chapter 7 cases. You should file chapter 7 only if you have no other way to get out of debt.
Chapter 13 bankruptcy can be the best way to keep your home if you are underwater on mortgage payments. It does not necessarily guarantee, though, that you can escape foreclosure or the need to go to a short sale to repay your debts, and it does hurt your credit score for a long time to come. However, it should at least give you some breathing space as you work out what to do. If you have received a foreclosure notice you should consider whether filing Chapter 13 is the best way to escape your debt trap.
If you decide to do so then you will need a good bankruptcy attorney. Contact Buettner Law Group for a consultation. We offer help to debtors in Minnesota who are considering filing Chapter 13 bankruptcy to prevent foreclosure and/or to reorganize overall debt into something more manageable.