Jan 30, 2012 12:26 PM
Times are very tough these days and you may be one of many who have fallen behind on your mortgage payments for your home. Your lender may now be moving forward with foreclosure. Some of you may able to work out deals with your lender to avoid foreclosure such as through a short sale, loan modification, loan forbearance or deed in lieu of foreclosure. Unfortunately, most lenders are not willing to make a deal.
However, the foreclosure process takes time. Most creditors do not begin foreclosing until you are two to three months behind on your mortgage payments. If you have determined that you cannot work out something with your lender, consider filing for bankruptcy as an alternative.
Bankruptcy and foreclosure are both words that the average person dreads hearing. However, if you are facing foreclosure, bankruptcy can become a tool to help you keep your house or at the very least delay the foreclosure. Once you file bankruptcy, such as Chapter 7 or Chapter 13, the court automatically issues an Order for Relief. This order grants you an "automatic stay" that directs your creditors to immediately cease their collection attempts no matter what. If a foreclosure sale has been scheduled for your home or business, it will be postponed by law, until the bankruptcy is finalized. This usually takes about three to four months.
There are a couple of exceptions to a possible attempt to delay the foreclosure: (1) The lender can file a motion with the bankruptcy court to lift the stay, and continue with the foreclosure sale. If this is granted, you may not receive the extra three to four months of time. However, bankruptcy normally still postpones the sale by about two months or more, or even longer if the lender does not act fast in filing the motion to lift the stay; (2) Most states have laws that require lenders to give homeowners a certain amount of notice before selling their property. If the foreclosure notice has already been filed by the lender, then a bankruptcy's automatic stay will not stop the clock on this advance notice.
What Is the Difference Between Chapter 7 and Chapter 13?
Chapter 7 bankruptcy is a liquidation of your assets with most of your unsecured debts written off within 90 days of filing. The bankruptcy will stay on your credit report for 10 years. Chapter 7 bankruptcy also cancels all the debt secured by the home, including mortgages and home equity loans. While debts will be forgiven, you will have to sell some of your property, with the proceeds distributed to your creditors. In most cases, this means you'll lose your house, as well as any expensive assets. However, there are certain exemptions for other assets, such as bank and retirement savings accounts, and property, like furniture and clothes, and the exemptions vary depending on the laws of your jurisdiction.
Chapter 13, on the other hand, is a repayment plan. You set up a three- or five-year schedule with your creditors. Chapter 13 bankruptcy remains on your credit report for seven years. With this type of bankruptcy, you may save your home and other assets.
Chapter 7 forgives your debt, and that is all it does. When you enter into a mortgage, you are agreeing to use your home as a type of collateral in case you default on your payments. Therefore, you will probably lose your home. Chapter 13 enables you to stop action on the repossession of your home, while you catch up on your payments; hence, you may save your home.
There are restrictions on the types of debt that can be discharged by the bankruptcy. Child-support, alimony payments and past tax bills are never dischargeable. Student loans are forgiven only in rare situations, such as poor health that prevents you from working. Creditors also have the right to object to the discharge of certain unsecured debts, such as large purchases for luxuries or cash advances made within 90 days of filing.
What is the Credit Affect from Bankruptcy?
Although bankruptcy and foreclosure are both extremely damaging to your credit, sometimes filing bankruptcy can be a wise choice when trying to rebuild credit. A foreclosure not only damages your credit score for years, but you are still left with the mortgage debt. Most mortgage creditors will not consider you for future mortgages if you have a foreclosure on your credit history. In contrast, bankruptcy lets you start fresh. It is still damaging to your credit, but because you are debt free, you immediately begin rebuilding good credit sooner.
Although bankruptcy has a few negative consequences, and may not save you from losing your home, it can be the best option in starting fresh with no debt, getting back on your feet, and saving money. Consider the alternative of bankruptcy when facing a foreclosure on your home.
Disclaimer: The information presented in this article is for general information only, and does not constitute legal, tax or other professional advice.
Sumeet P. Shah is Of Counsel to Neera Bahl & Associates, LLC and Principal Attorney at Shah Legal Group, LLC. His areas of practice include franchise, corporate, real estate, bankruptcy, estate planning and litigation. He can be reached at sumeet.shah@shahlegalgroup.com.
