Foreclosure can be downright terrifying, but there is something you can do to stop the bank from taking your house away.
If you’re in this unfortunate situation, you may be able to file for bankruptcy to keep your house. But how does it work?
Keep reading to learn what you can do to stop foreclosure.
How to Stop Foreclosure
When an individual files for bankruptcy, an automatic stay is implemented. Once this happens, the individual gets a break from being harassed by debt collectors, and there will be a delay of foreclosure, at a minimum. How long that lasts will depend on the type of bankruptcy.
The automatic stay is a remedy provided in the U.S. Bankruptcy Code under 11 U.S.C. §362 that provides immediate relief from debt collectors attempting to seize your property upon filing a bankruptcy petition.
This may be great news if you’re facing a foreclosure because it is about the only method to stop a proceeding without bringing the loan current. However, it is best to consider the pros and cons of filing for bankruptcy before making any sudden moves, and it is important to seek help as early as you can to ensure you are an appropriate candidate.
Types of Bankruptcy
There are five typical types of bankruptcies. However, most individuals will consider Chapter 7 (liquidation) or Chapter 13 (reorganization).
Chapter 7 is common for individuals with low income and minimal assets, as it generally allows valuable assets to be liquidated to pay for debts. It usually helps eliminate unsecured debts, but secured debts, like a mortgage, survive. Usually, someone in foreclosure would seek assistance in Chapter 7 only if they were willing to walk away from the real estate but want to be sure they do not owe any deficiency balance on the mortgage. And they generally would have other unsecured debts they can simultaneously get relief from.
Conversely, with Chapter 13, a repayment plan is created and implemented (usually for 3-5 years). Some secured debts can be discharged while also eliminating unsecured debts. Essentially it is like a refinancing of the mortgage arrears through the Court, but it can be done even without the lender’s approval.
Below you’ll find lists of general pros and cons that apply.
1. Granted Automatic Stay
This is one of the greatest advantages of filing for bankruptcy. It buys you time to think about what you need to do next. You’ll have breathing room, and debt collectors can’t contact you because they’ll be breaking the law if they do. However, this relief is limited. If you are in Chapter 7, at most it will last about 3 months, the time it takes for the case to be over. But it could be even more limited if the creditor files a motion asking the Court to allow them to proceed. If you are in Chapter 13, the stay could last through the entire case, but only if you begin paying the regular monthly payment next due after filing and thereafter, and you propose a plan to pay the back payments.
2. Debts Settled
Another benefit to consider is that all your debts will be settled in some fashion through bankruptcy. Depending on what is determined, you may be able to pay less than what is required, or sometimes you won’t have to pay anything at all to unsecured debts.
3. A Fresh Start
Filing for bankruptcy may give you a clean slate to build a new financial future. It can allow you to make better financial decisions and rebuild a better credit rating.
1. Your Credit Score Will Take a Hit
Expect your credit score to take a hit after filing for bankruptcy. Once your bankruptcy is over you will be able to obtain credit, but initially, you will face skeptical creditors offering little credit and high-interest rates. It can take time and effort to rebuild your credit score.
2. It Stays on Your Credit Report for Years
Because a bankruptcy is on your credit report, it may impact credit-related purchases, show up in background checks for rentals, job applications, etc. A Chapter 7 is on a credit report for ten years. A Chapter 13 is on a credit report for seven years. But those years don’t necessarily all impact your credit score. Once your bankruptcy is completed, your credit score will mostly be based upon what you do with your new post-bankruptcy credit.
3. You Likely Won’t Be Able to Purchase a House for a Few Years
Individuals who are wondering, ‘how long after chapter 7 can I buy a house,’ you’ll have to be patient. This can be difficult to put a number on, because it depends on the current housing market and lender demands. While in the past people have been able to obtain mortgages within a year or two of bankruptcy, in a tight market you may have to really work to bring up your credit score and use a mortgage broker familiar with multiple lenders and their standards. Some government lenders, like FHA and VA have specific standards of up to four years, particularly if you have a past foreclosure.
Work with a Bankruptcy Attorney Today!
Can bankruptcy stop foreclosure? Yes, it can! If you have regular monthly income and have had a temporary hardship that made you become delinquent, you may be able to afford a restructuring of the debt to keep your home.
If you need compassionate, experienced guidance with the bankruptcy process, reach out to Mette Evans & Woodside today.