Using bankruptcy to save your home from foreclosure

Both types of bankruptcies are helpful in avoiding foreclosure.

Although things are becoming undoubtedly better than they were, many Kentuckians are still feeling the effects of the 2008 recession. As a result, many are feeling the financial pinch due to unemployment or underemployment. Unfortunately, this can cause some to fall behind on their mortgage payments and face foreclosure. To keep their most important asset, the family home, many would like to seek the relief that bankruptcy offers, but wonder which type of bankruptcy would best help their situation. Fortunately, both types of bankruptcy can help keep the home from being lost.

Chapter 7 and foreclosure

During Chapter 7 bankruptcy, a bankruptcy trustee gathers and sells the filer's nonexempt property and applies the proceeds of the sale towards his or her debts. Although this sounds like the filer would also lose his or her home, this is not necessarily the case, as bankruptcy exemptions allow filers to protect the equity in their home up to a certain amount. As a result, most filers are able to keep their home throughout the Chapter 7 process.

Once bankruptcy is filed, the automatic stay temporarily stops all foreclosure proceedings. However, the effect is only temporary when it comes to foreclosures, as lenders can ask the court to lift the stay within a few months after filing.

Because of this, Chapter 7 is not the best long-term option for those that cannot afford their mortgages but would like to keep their homes. Instead, this type of bankruptcy is best for those that are current on their mortgage payments, but are having problems keeping up, due to other types of debt, such as medical bills or credit cards. Chapter 7 can discharge this and other types of debt, allowing the filer to more easily stay current on the mortgage payments.

Chapter 13

Chapter 13 is typically better for those that have a regular income, but have fallen behind on their mortgage payments. In this type of bankruptcy, there is no sale of assets. Like Chapter 7, the automatic stay goes into effect once bankruptcy has been filed. However, unlike Chapter 7, the protection against foreclosure is not temporary.

The mortgage, along with other types of debt, is consolidated into a payment plan. Under the plan, the filer makes the past-due payments on the mortgage over a three- to five-year period. Once the payment plan has been approved by the court, the mortgage lender may not foreclose on the filer's home, provided that he or she continues to make monthly payments pursuant to the plan. At the end of the repayment period, the filer emerges current on his or her mortgage and free of most other types of debt (e.g., credit cards), allowing a fresh start.

Speak to an attorney

The type of bankruptcy that would be right depends on the filer's individual situation. If you are facing foreclosure, it is important to consult with an experienced bankruptcy attorney. An attorney can analyze your situation and recommend the solution that would best protect your home.

Keywords: foreclosure, Chapter 7, Chapter 13