Filing for Bankruptcy on Home Foreclosure

The troubled borrower may decide to file for bankruptcy to avoid losing his home. However, this may only be a temporary fix to keep the home. Credit card debts and personal loans are discharged, and the borrower may now have sufficient funds to cover mortgage payments. But the homeowner has no guarantee that he can keep the home. 

Automatic Stay

When a person files for bankruptcy, the filing creates an automatic stay. The stay temporarily stops foreclosure proceedings. This process does buy time for the borrower to work out a plan with the lender, but without an arrangement, is usually only a temporary delay. The lender can ask the court to lift the stay to proceed with the foreclosure. 

Chapter 7 Bankruptcy

If the borrower files for bankruptcy under Chapter 7, 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 the homeowner has 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 the homeowner is a Chapter 13 bankruptcy. The borrower submits a plan to pay back debts over three to five years. This plan must meet certain conditions, but upon court approval, 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. Sometimes in a Chapter 13 bankruptcy, the homeowner may be able to remove second or third mortgages. They may be converted to unsecured debt by the court and then automatically discharged. Another advantage is that other payments will be reduced and consolidated, which frees up money for the mortgage payments.

Ordinary Debts Discharged

Debts like credit cards balances will be discharged at the end of the bankruptcy. If the borrower worked out a settlement with ordinary creditors that involved them writing off a portion of the debt, the homeowner would need to pay income tax on the forgiven portion of the debt. Debts discharged in bankruptcy are not counted as income by the IRS.

If you are considering filing for bankruptcy, you would be wise to seek professional advice from a bankruptcy attorney on your rights and liabilities.