If you are closing in on 3 months behind in your mortgage obligations, it might be time to consider bankruptcy as an option. Financially, bankruptcy is considered a last-resort option, but it does include a few advantages, including the ability to hold off creditors–including your mortgage company–while you handle your financial difficulties. But foreclosure will be only prevented by insolvency .
When to Consider Bankruptcy
The ideal time to consider bankruptcy is when you’ve fallen a minimum of three months behind in your mortgage obligations. At this point, your lender is very likely to locate your loan in default and begin foreclosure proceedings, of which you will be notified. With this point, your choices to refinance the loan or to work out a new payment plan with your creditor have likely dwindled. Foreclosure means your creditor needs the whole sum for the home, and if you do not have the money to cover it, you’ll end up on the hook for a significant sum of money.
Filing Bankruptcy Before the Foreclosure Sale
If you declare bankruptcy ahead of the foreclosure sale of your home, you’ll get what is called the automatic stay. For the most part, an automatic stay offers you protection against foreclosure. It means you can stay in the home. It also means your creditors can’t come after you to get cash until your case is discharged. Your creditor has the choice of attempting to get the automatic stay lifted, yet this process typically takes 2 to 3 months. So even if your creditor has the stay lifted, most bankruptcy cases are done within 90 days of filing, which means that you could be discharged prior to the purchase.
Chapter 7 bankruptcy usually means that you don’t have the financial means to cover any of your bills. When you are discharged, you are released from your obligation to pay your debts. However, Chapter 7 doesn’t prevent foreclosure on your property. The reason is that while your obligation to repay is released, the lien on the home is not canceled. The lien is the thing that takes you to give the home as collateral if you cannot repay. Therefore, in Chapter 7, the understanding is that you are likely going to concede your home to the bank anyway.
In Chapter 13, there is an opportunity to keep your home and protect against foreclosure. During the automatic stay, you’ve got a chance to work out a fresh agreement with your lender. This agreement will likely consist of paying off the late payments and late interest during a period of around 5 years as part of a new loan agreement. You must have the money to manage the new payments and you must make all your payments in time. However, in case you can do this during the 3- or 5-year repayment period, you can keep your home. 1 benefit in Chapter 13 is that your trustee has the choice to get rid of second and third mortgages and convert them into unsecured debt, meaning that you likely won’t have to pay them off. This could occur if you do not have sufficient equity in your home to secure the rest of the mortgages.
If you go through insolvency, the law as currently written doesn’t hold you accountable for unpaid taxes as a consequence of the defaultoption, which would be another reason to consider bankruptcy if you’re in default on your property. There are exceptions in Chapter 13, such as nonmortgages, with home equity capital for extra-curricular activities such as vacations, or loans for nonprincipal homes. But filing for Chapter 7 allows you to use these exemptions too, meaning that the losses won’t go on your tax return.