Automatic Stay

When a person files for bankruptcy, the filing creates what is called an automatic stay. This stay temporarily stops foreclosure proceedings. The filing of a bankruptcy without more, however, is only a temporary fix. The lender can ask the court to lift the stay unless certain arrangements are in place.

Chapter 7 Bankruptcy

If the borrower files a Chapter 7 bankruptcy, the borrower may be able to reaffirm the mortgage. This option requires the borrower to get caught up on the payments and pay the remaining ones as they come due. This can work if you are only a few payments behind, but in many cases it is not possible. Moreover, the lender is not required to reaffirm the mortgage under most circumstances.

Chapter 13 Bankruptcy

Another bankruptcy option for a homeowner with a mortgage is a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, the borrower submits a plan to pay back debts over three to five years. The plan has to meet certain conditions, but if the court approves it, the lender cannot foreclose on the home. The Chapter 13 plan can permit the borrower to catch up on mortgage arrearages over the life of the plan, but the borrower must make current mortgage payments as they come due.

Chapter 13 bankruptcy offers some additional advantages. Sometimes in a Chapter 13 bankruptcy, you’ll be able to “avoid” second or third mortgages. Another advantage is that your other payments will be reduced and consolidated, which will free up money for mortgage payments.

Ordinary Debts Discharged

Ordinary debts like credit cards will be discharged at the end of the bankruptcy. If you worked out a settlement with ordinary creditors that involved them writing off a portion of the debt, you would have to pay income tax on the forgiven portion of the debt. Another advantage of bankruptcy is that debts discharged in bankruptcy are not counted as income by the IRS.

If you are thinking of filing for bankruptcy, you would be wise to seek professional advice from a bankruptcy attorney.