Bankruptcy and foreclosure are two words borrowers never want to hear. Unfortunately, due to Covid-19, more people are being forced to face the reality of both situations. While federal and state governments have taken steps to help borrowers, these solutions are generally band-aids and not solutions.
Many people don’t know they can use bankruptcy to stop foreclosures from occurring. Naturally, people want to know, how exactly can filing bankruptcy stop a foreclosure? That is where it can get tricky because there are two types of bankruptcy, Chapter 7 and Chapter 13. While there are advantages and disadvantages to each, both immediately stop the collection process and pause a potential foreclosure.
For some, bankruptcy and foreclosures are imminent and need some real solutions. This is why we detail bankruptcy, along with other alternatives to help deal with a potential foreclosure.
How To Prevent Foreclosure
If you are facing a possible foreclosure, start by filling out a free questionnaire and let us use our experience to help you avoid foreclosure.
Mortgage Loan Modification
Altering your current loan may prevent bankruptcy and foreclosure. Loan modifications simply change the mortgage terms. Banks may consent to changes of the loan’s monthly payment, length, or interest rate. Changing terms often results in a more manageable financial plan.
Repayment plans are used for payments past due. Banks and borrowers work together to create a scheduled payment plan that can help bring your mortgage current. The plan spreads out the amount due and adds it to the current monthly payments.
A mortgage forbearance occurs when the lender agrees not to foreclose on the mortgage during an agreed-upon period. During the forbearance period, the monthly payment can be reduced or paused. Since the start of Covid-19, legislative acts have been created to assist borrowers survive the economic landscape. Both President Trump and Governor Cuomo signed executive orders requiring forbearance periods.
A short sale is an escape from a mortgage that borrowers are behind on. To prevent bankruptcy and foreclosure, the owner sells the house for less than the outstanding mortgage. Short sales approved by the lender satisfy outstanding mortgages, and the seller saves their credit score by avoiding foreclosure.
Does bankruptcy stop foreclosure? Yes, at least temporarily, lenders are not allowed to foreclose when the owner files for bankruptcy. Both Chapter 13 and Chapter 7 bankruptcy put an immediate hold on any foreclose sales. During this time, borrowers can make payments and satisfy the delinquent payments.
Will Bankruptcy Stop Foreclosure
Does bankruptcy stop foreclosure sales permanently? The answer is it depends. Bankruptcy itself does not stop foreclosures from happening, it provides borrowers an opportunity to make payments. When borrowers file for bankruptcy, the bank may not foreclose on the property. Therefore, borrowers may use bankruptcy to stop foreclosure.
How quickly can bankruptcy stop foreclosure? As soon as the bank has notice of the bankruptcy proceeding, they may not pursue foreclosure.
When can filing bankruptcy stop foreclosure? How does bankruptcy stop foreclosure? We answer these questions below.
When Can You File Bankruptcy
When can bankruptcy stop foreclosure? If it feels like your bills are drowning you and your debts are mounting, bankruptcy offers a solution. Borrowers may file either Chapter 7 or Chapter 13 bankruptcy when their debt exceeds their income. If your disposable income is below your state’s average income, you must file Chapter 7 bankruptcy. Borrowers can choose both forms of bankruptcy to stop foreclosure.
If there is insufficient time to fill out the paperwork, use an emergency bankruptcy filing to stop foreclosure. Having an attorney help with the emergency filing will ensure it is done correctly. Peter Brown has experience in bankruptcy and can help with your emergency filing to stop foreclosure.
Prior to filing bankruptcy, a borrower should consider their current and future financial position. For someone in a stronger position, they may be able to survive some damage to their credit report or keep up with a repayment plan. Some borrowers may desire to keep their house, while others may want to completely start fresh. Both Chapter 7 and Chapter 13 have their advantages and disadvantages depending on the borrowers situation.
What To Consider When Declaring Bankruptcy
All debt collection is paused when bankruptcy is filed. How can bankruptcy stop foreclosure? Through a court order. The court prohibits debt collectors from contacting the debtor in any manner until the case is complete or the pause is lifted.
Under Chapter 13 bankruptcy, the borrower can catch up on delinquent payments. The court will issue a payment plan over 3-5 years, and as long as the payments are made, they are in the clear. Once the set period is over, the debtor does not have to worry about their creditors or loans anymore.
A debtor in Chapter 7 bankruptcy gets to start fresh. A Chapter 7 bankruptcy clears all debt the debtor owes and allows the debtor to move on.
Unfortunately, bankruptcy stays with the borrower for years. The borrowers credit reports and credit score suffer. Credit reports show a Chapter 7 bankruptcy for up to 10 years and a Chapter 13 bankruptcy appears for 7 years. A damaged credit report makes approval for a loan or credit card more difficult. If you are fortunate to get a loan or credit card, your interest rates will be higher. Bankruptcy also impacts everyday necessities, such as getting a job or approval for renting an apartment.
Under Chapter 7 bankruptcy, your home will likely be sold off automatically. Chapter 7 liquidates all assets to pay your creditors, including the house. Someone from the bank will run the foreclosure sale. Chapter 13 bankruptcy is much more forgiving, and filers will not lose their home if they keep up with the court-mandated payment plan.
Alternatives to Bankruptcy
Several alternatives exist to avoid bankruptcy. Some of these alternatives are:
- Debt consolidation- Borrowers take out a single loan to pay off all other loans. Typically, a debtor will borrow against their house and receive a personal loan. This helps because home equity loan interest rates are typically lower than other loans. Paying off several loans with one personal loan will make it easier for the debtor to get a grasp of their debt and overcome it.
- Settle or Negotiate with Creditors– Debtors with some income or assets they’re willing to sell should contact their creditors. First, negotiating with your creditors will provide some time for you to recover financially. Secondly, the creditor might agree to accept less than you owe.
- Credit counseling- Similar to Chapter 13 bankruptcy, counseling involves developing a plan to repay creditors over time. However, credit counseling doesn’t appear on the debtor’s credit record.
- Restructure or Refinance mortgage- Through modifying your loan, the lender gives you more time to pay it off. With the extra time and lower payments, debtors are typically able to stay current and avoid bankruptcy.
Can You Keep Your House If You File Bankruptcy
Can filing bankruptcy stop foreclosure? Yes, but keeping your house will depend on several things. First, can you make mortgage payments once you file for bankruptcy? If you cannot afford your mortgage, you will lose your house.
The next factor is the type of bankruptcy you file. Under Chapter 7 bankruptcy, the debtor can declare a certain amount of property exempt. Meaning the court cannot force a sale from it. The amount of equity you own must be less than the exemption amount. Debtors with equity over the exemption limit are required to sell their homes and pay debts out of their equity.
Chapter 13 generally allows debtors to keep their house. A payment plan is arranged, and as long as the debtor makes these payments, they keep their house.
Getting Help From Foreclosure Attorney
The bankruptcy and foreclosure process are very technical and difficult to navigate. Hiring an attorney can make the whole process much easier and get you a better result. The attorney will be familiar with the courts, including judges and opposing attorneys. These relationships will allow them to negotiate a better deal.
If you are facing bankruptcy or foreclosure, Peter Brown can advise you on the best way to keep your home. Start the process of saving your house by filling out a free consultation form.