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.
The Fear of Foreclosure in the United States
More Americans are facing foreclose than ever before. The current housing crisis has had an impact on how everyone, including mortgage companies, makes decisions. The late 90's in America saw a boom in the value of homes; property values appreciated at unprecedented rates, and many homeowners saw the benefits of their new found home equity. Mortage companies also saw it as an opportunity to offer more "creative" mortgage options and many people who would otherwise not qualify for a home mortgage were given financing for homes they could not afford.
Current interest rates are high, and the market is in a slump. The value of homes has continued to depreciate, and those homeowners with adjustable rate mortgages (ARMs) are now feeling the effects of the dramatic increase in their monthly home payments. These homeowners have little or no equity in their houses anymore.
It is unfortunate that most consumers do not know that Chapter 13 bankruptcy can stop foreclosure. For many, the term "bankruptcy" conjurs up bad images; the loss of all personal belongings, ruined credit, liquidation of precious assets. What they don't know is how beneficial filing for Chapter 13 bankruptcy can be. If you have fallen behind on your mortgage payments and you want to keep your home, Chapter 13 bankruptcy might be the right option for you. It can be a very powerful tool in stopping the foreclosure of your home or repossession of your vehicle.
What is Mortgage Foreclosure?
Foreclosure is a legal process by which property that was used to secure a debt is sold in order to satisfy the debt. This occurs when there has been a default in payment on the debt.
While the exact process differs from state to state, generally problems begin when mortgage payments are 16 days past due. It is still possible to work out a repayment plan, but most often homeowners do not do this. This is because they are most likely in the midst of financial turmoil, or they hope that by their next paycheck, thigns will get better.
Waiting too long is a bad idea as it can lead to foreclosure. Homeowners with significant equity in their home (generally at least 15-25%), and their payment is is less than 90 days past due, they may be able to stop foreclosure, including refinancing. If a loan is more than 90 day spast due and the homeowner does not have significant equity in the home, refinancing may not be an option. in those instances, Chapter 13 may allow the homeowner to stop foreclosure.
How Can Chapter 13 Bankruptcy Stop Foreclosure?
In many instances, people file for Chapter 13 bankruptcy specifically to stop foreclosure. An automatic stay is generally entered as soon as a Chapter 13 bankruptcy petition is filed. This temporarily halts the foreclosure, as well as other collection actions, regardless of what stage the foreclosure proceedings are in. This allows the debtor some breathing room to regroup and work out a financial repayment plan with their attorney.
How Does Chapter 13 Bankruptcy Work?
A debtor must file a proposed repayment plan within 15 days after filing for Chapter 13 bankruptcy. This plan mus tinclude their income, allowable living expenses and proposed payments to the trustee for the benefit of creditors. Current payments must continue to be made after the Chapter 13 petition is filed.
If you own a home, you must make all mortgage payments due during the Chapter 13 repayment plan. Failure to do so may gives the bankruptcy court the right to lift the automatic stay, which allows the mortgage company to resume foreclosure proceedings. If all plan payments are made in a timely manner, homeowners are given the chance to catch up the past due mortgage payments over a period of 3-5 years. They may also qualify for refinancing after a period of repayment.
Who Can File for Chapter 13 Bankruptcy?
Not everyone will qualify for Chapter 13 bankruptcy protection. In order to qualify, a debtor must:
- Receive a regular income that allows you to make pre-determined payments to the bankruptcy trustee, who will use it to pay your creditors;
- After paying your current bills, have disposable income that affords you to make regular payments to the trustee, while still covering your current necessary living expenses;
- Meet the pre-set limits for secured and unsecured debts. The limits are updated periodically; a local bankruptcy attorney can keep you posted about the current limits.
If you do not qualify for Chapter 13 bankruptcy, do not worry. You may still qualify for filing Chapter 7 bankruptcy.