How bankruptcy can help those facing foreclosure

The effects of the recession of 2008 are still being felt in Mississippi and across the country. As a result of job losses or sudden financial emergencies, many people are facing foreclosure and turn to bankruptcy as a way out. However, most people find that they must choose between two types of bankruptcy: Chapter 7 and Chapter 13. Although both types of bankruptcy have their own approaches to debt relief, each can offer help to those facing foreclosure.

Chapter 7

In Chapter 7, the debtor's non-exempt property is sold to pay back his or her debts. Although this seems drastic, must of the debtor's property such as personal belongings, furniture and homesteads up to a certain value is exempt from the sale.

Once Chapter 7 (or any type of bankruptcy) is filed, the automatic stay goes into effect. The stay prevents creditors, including mortgage lenders, from continuing to make efforts to collect debts (i.e. foreclosure). Although this process delays a pending foreclosure action, it does not prevent it from happening eventually, as the mortgage lender can ask the bankruptcy court to lift the stay to allow the foreclosure to continue after a few months.

As a result, Chapter 7 is not ideal for those who would like to permanently stop foreclosure proceedings. Instead, this type of bankruptcy may be desirable for those who cannot afford their mortgage payments and would like to surrender their homes back to the lender without being liable for a deficiency judgment if the lender resells the house for less than the amount due on the mortgage.

For those who are current on their mortgage payments and who have a home that is not worth enough to be sold in the bankruptcy sale, Chapter 7 can also help by eliminating other unsecured debt such as credit cards or medical bills. This can free up additional funds that can be used to stay current on the mortgage.

Chapter 13

Debtors that have a regular month income can opt to file for Chapter 13 instead. Unlike Chapter 7, there is no bankruptcy sale in Chapter 13, so debtors keep their property throughout the process. However, like Chapter 7, once Chapter 13 is filed, the debtor gets automatic relief from any pending foreclosure action.

Once the stay is in effect, Chapter 13 works by consolidating all of the debtor's debts into a payment plan. As far as the mortgage goes, the debtor makes all past-due payments each month over a three to five-year period. The amount that the debtor must pay each month is kept affordable, as it is based on his or her disposable income.

Once the court has approved the payment plan, the mortgage lender cannot foreclose on the debtor's home as long as he or she makes payments under the plan each month. Once all payments have been made under the plan, the homeowner emerges from bankruptcy caught up on his or her mortgage and is free of any unsecured debt that was not fully repaid under the plan.

Chapter 13 can also help homeowners who owe more on their second mortgages than their home is worth. Chapter 13 treats these mortgages as unsecured debt, so it is discharged at the end of the bankruptcy with the other unpaid unsecured debt.

An attorney can help

As bankruptcy is complicated and full of exceptions, it is important to consult with an experienced bankruptcy attorney before you file. An attorney can consider your individual situation and recommend an option that would best address your needs.