While the national unemployment rate has dropped slightly, we still aren’t out of the woods. Even many who are working have fallen behind on payments, leading to risk of foreclosure. If you’re considering filing for Chapter 13 Bankruptcy to prevent foreclosure, here are a few things to consider first.
Understanding Foreclosure
Until your home is completely paid off, a third party has the power to collect on it as collateral for debts unpaid. In most cases, a bank or mortgage company loaned you the money to buy the house and you pay monthly payments for thirty years or until you move, at which point you either take over ownership or sell the house to pay off the remainder of the loan.
But what happens if circumstances leave you unable to make those payments? As with any loan, you can only miss so many payments before your lender takes action. First they will attempt to collect and your credit score will be affected. Then they will begin taking steps to foreclose.
When a creditor forecloses on your home, they must first obtain a court order to get permission to take possession. The bank does not own your home—it is simply collateral in the event you fail to pay. The bank’s only interest at this point is recouping its money and it will seize your home and sell it to pay off the remainder of your debt.
First you will receive a notice of foreclosure giving you a set period of time to make payments before foreclosure occurs. At this point you may refinance, pay off the debt, or sell the home. Another, fourth option has some homeowners doing research: filing for chapter 13 bankruptcy.
Can Chapter 13 Bankruptcy Save Your Home?
When you file for Chapter 13, an automatic stay will be issued by the court. This will, in effect, stop foreclosure procedures on your home. While this may seem a simple antidote to losing your home, there are a few things you should understand about Chapter 13 Bankruptcy.
Chapter 13 bankruptcy simply means you plan to reorganize and pay your debts. Unlike Chapter 7 Bankruptcy, where your assets are liquidated and your creditors repaid, Chapter 13 Bankruptcy requires that you have a way to repay your debts over time. It is, in essence, a form of debt consolidation.
The good news about a Chapter 13 Bankruptcy is that you will be able to get certain loans after a one- to two-year period has passed. This does not mean creditors will not be skittish about giving you such a loan, however. Chapter 13 Bankruptcies can stand out on credit reports and hurt your chances of getting loans, so think carefully before filing. A Chapter 13 Bankruptcy filing will remain on your credit for seven years following your filing. (Chapter 7 remains for ten years.)
The best thing to do when you find yourself in trouble with creditors is to try to make payment plans and consolidate your debt yourself. Often simply calling and offering to lower your payment on items like credit cards can go a long way.
But in most cases, Chapter 13 Bankruptcy is filed by individuals in order to protect a home against foreclosure. It’s important to note, however, that you will still be expected to begin to make mortgage payments. This is not a way to get out of paying for your house—simply a way to force your mortgage company or bank to give you time.
In order to qualify for a Chapter 13 Bankruptcy filing, you will need regular income. The court will need to see that you are able to repay your debts and have every intention to do so. During the automatic stay issued by the courts, you will have to show that you are paying your mortgage and other debts and attempting to get your finances in order. You may also include smaller items like car payments, credit card payments, and college loan bills in your reorganization, provided you meet the other criteria for filing.
If you’ve gotten yourself into a situation where your home may be foreclosed on, a Chapter 13 Bankruptcy filing may be the best solution for you. It will allow you to remain in your home while you try to get back on your feet again.
Making the decision to file bankruptcy can be confusing and difficult. Contact the Law Office of Brian R. Lewis today for your free initial consultation today!