If you’re facing foreclosure, and you can’t seem to strike a deal with your lender, filing bankruptcy may be able to help.
If you fall behind on your mortgage payments, your lender may take steps to foreclose on the property – meaning it may take back your home and sell the property at a public auction.
The foreclosure process doesn’t happen overnight. In Colorado, a foreclosure typically starts after you fall behind on your payments for at least two months, and often three or four. This window of opportunity (commonly the reason behind a “strategic default”) will provide some time for you try alternate methods, such as loan forbearance, a short sale, or a deed in lieu of foreclosure.
If you’ve already tried these options, filing bankruptcy may provide another option to avoid or stall foreclosure. Here are some examples of how filing for bankruptcy can help you –
The Automatic Stay Delays Foreclosure
When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order (called an “Order for Relief”) that contains a powerful tool known as the “automatic stay.” The automatic stay is a shield that legally forces your creditors to cease all of their collection activities immediately – no excuses. If your home is scheduled for a foreclosure sale, the sale will be postponed by the Bankruptcy Court while your bankruptcy case is processed, which typically takes three to four months. However, there are two important exceptions to this rule:
Motion to Lift the Automatic Stay. If the lender obtains the bankruptcy court’s permission to proceed with the sale by filing a “Motion to Lift the Automatic Stay”, you may lose the customary three to four months. But even then, your bankruptcy filing will typically postpone the sale for at least two months (or more), depending on the speed with which your lender files its Motion to Lift the Automatic Stay.
Foreclosure Notice Already Filed. Unfortunately, bankruptcy’s automatic stay won’t stop the clock on the advance notice that most states require before a foreclosure sale can be held (or a Motion to Lift the Automatic Stay can be filed).
How Chapter 13 Bankruptcy Can Help
Many people will do almost anything to stay in their homes for the indefinite future. If this describes you, and you’re behind on your mortgage payments with no feasible way to get them current, the only way to keep your home is to file a Chapter 13 bankruptcy.
How Chapter 13 Works. Chapter 13 bankruptcy lets you pay off the “arrearage” (late, unpaid payments) over the length of a repayment plan you propose (usually five years). You will need to demonstrate to the court that you earn enough income to at least meet your current mortgage payment at the same time you’re paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you’ll be able to avoid foreclosure and keep your home.
Stripping Off Second and Third Mortgage Payments. Chapter 13 may also help you eliminate the payments on your second or third mortgage. This is because, if your first mortgage is secured by the entire value of your home (which is possible if your home has dropped in value recently), you may no longer have any equity with which to secure the later mortgages. In this scenario, the bankruptcy court may allow you to “strip off” the second and third mortgages and re-categorize them as “unsecured debt.” Then, under your Chapter 13, you’ll be able to discharge these debts after successfully completing your Chapter 13 plan.
Canceling Debt. Chapter 7 bankruptcy will also cancel all the debt that is secured by your home, including your mortgage, as well as any second mortgage(s) and home equity loans.
Canceling Tax Liability for Certain Property Loans. Thanks to a new law, you no longer face tax liability for losses your mortgage or home-improvement lender incurs as a result of your default, whether you file for bankruptcy or not.
However, the new tax law doesn’t shield you from tax liability for losses the lender incurs after the foreclosure sale if:
- Your loan is not a mortgage or was not used for home improvements (such as a home equity loan used to pay for a car or vacation); or
- Your mortgage or home equity loan is secured by property other than your principal residence (for example, a vacation home or rental property).
This is one way Chapter 7 bankruptcy helps. It exempts you from tax liability on losses the lender incurs if you default on these other loans.
Chapter 7 Cannot Cancel the Foreclosure.
With all this debt being cancelled, you may be wondering why the foreclosure on your home won’t be cancelled too. The trouble is, when you bought your home you probably signed two documents (at least)—a promissory note to repay the mortgage loan, and a security agreement that could be recorded as a lien to enforce performance on the promissory note.
Chapter 7 bankruptcy will discharge your personal liability under the promissory note, but it doesn’t remove the lien. Chapter 7 will get rid of your debt but not the liens – you’ll still probably have to give up the house under the lien because that’s what your pledged as collateral for your loan.
If All Else Fails: Relief From Debt and Tax Liability
If you’re certain you won’t be able to propose a Chapter 13 repayment plan that a bankruptcy judge will approve, and Chapter 7 will provide only a temporary delay from the foreclosure sale, then what’s the point of either?
If you have to lose your home, you can at least view bankruptcy as the best way to get out from under your mortgage debt and tax liability. Bankruptcy also offers a way to save some money, which will help you find new shelter and weather the process of re-building your credit.
If you have questions about Chapter 7 or Chapter 13 Bankruptcy in Maryland, call us today. All consultations are free. Our phone number is 1-800-NEW-START, so call today to get you new start.
David L. Ruben, Esquire