Using Bankruptcy to Stop Foreclosure

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The housing bubble has burst. Many people with depraved mortgage terms are finding it more and more difficult to keep up with payments. Adjustable rate mortgages (ARMS), a huge number of which were written in the last two to three years, have raised interest rates higher than many mortgage holders can afford. The holders of other subprime mortgages and “exotic” products like interest only mortgages, have found it more and more difficult to negotiate refinancing terms. Consider these facts:

- The New York Times reports that about 1.5 million homes were in foreclosure at the end of June.

- Several million more mortgages may be in default in the coming year as the slowing economy reduces housing prices and jobs are lost.

- Nearly one in 10 mortgages is either delinquent or in foreclosure.

While many people are walking away from their dream homes and high-priced mortgages, others are certain to stay in. Some mortgage lenders, like JPMorgan Chase and Bank of America, have announced plans to reduce or place a moratorium on foreclosures and to negotiate interest rate cuts, at least in the short term. These plans will affect only a diminutive percentage of mortgages, many of which are owned by investors, not the bank or company who accepts your payments and services the loans.

For those not lucky enough to fall under one of those umbrellas, another option may stop foreclosure, even on the very day the foreclosure is scheduled, give you a minute breathing residence and get you caught up on your mortgage payments, as well as other delinquent payments. It may even allow you to eliminate credit card debt and other unpaid personal debt like medical bills.

It’s called Chapter 13 bankruptcy

Do not be set off by the name. Yes, this is a form of bankruptcy, but it does not require liquidation of your assets. Instead, Chapter 13 requires that you consolidate grand of your debt into a monthly payment that you make to Chapter 13 trustee for a period of usually five years. The trustee then distributes your payments to creditors according to a thought you file with the U.S. Bankruptcy Court and claims on that money filed by your creditors.

Here’s how it works: Once a Chapter 13 bankruptcy case is filed with the bankruptcy court, the bankruptcy laws provide that no suitable action can be taken against you or your property without court permission. This is called the “automatic end”, (“conclude” being another word for injunction). The good news for those in foreclosure? The filing of a bankruptcy case will stop even foreclosures, and even on the day the foreclosure is scheduled as long as it is filed before the actual foreclosure sale occurs.

Once the case is filed, you will be required to file a plan of repayment with the court. The plan will provide that you launch making your regular mortgage payments – usually beginning on the next scheduled payment date. Some bankruptcy courts will have you make your mortgage payment to the Chapter 13 trustee, who will in turn pay the mortgage servicer. Other courts allow you to make your payment directly to your creditor.

Here’s the good part. All those delinquent payments you’ve missed can be paid back over the course of five years. The repayment understanding will calculate how much needs to be paid back, along with other loans like car loans that might also be delinquent. To the extent your budget will allow, you might also be required to pay back all or a fraction of the unsecured debt (credit card balances, medical bills, personal loans, etc.) that you owe.

Here are two important bonuses. If you qualify, you may be able to use your Chapter 13 plan to renegotiate high interest rates on car loans. In addition, once your notion is accepted by the court, any unsecured debt that remains unpaid at the end of the five year repayment period may be forgiven (bankruptcy lawyers call that “discharged.”)

Chapter 13 bankruptcy is not an easy row to hoe. You will be required to stick to a strict budget. If you become delinquent in your plan payments, your case might be dismissed. If you get behind on your house payments, the lender can petition the court to allow it foreclose anyway. But, if you’re able to successfully complete your repayment plan, you’ll emerge from Chapter 13 bankruptcy with a modern mortgage, perhaps a paid off car, and much less unsecured debt.

Great! How do I get started?

Although it is possible to file a Chapter 13 bankruptcy without the help of a lawyer, no one would recommend it. Chapter 13 is complex, and there are many pitfalls for the unwary. An experienced bankruptcy attorney will know the right steps to take. Even if you don’t have the money to pay an attorney, most attorneys do not charge for an initial consultation. If you and your bankruptcy attorney decide that Chapter 13 is best solution for you, most Chapter 13 repayment plans can be set up to allow you to pay your attorney over time through the plan payments. In some cases, even the filing fee charged by the bankruptcy court can be paid in installments.

The important thing to remember is that you must act quickly. The Bankruptcy Code requires that you receive a session of credit counseling to help you in making this important decision. If you wait till the eve of foreclosure, it may be too difficult to obtain proof of that counseling and to gather enough information to make the bankruptcy filing possible.

Where do I find a qualified attorney?

An excellent source is the National Association of Consumer Bankruptcy Attorneys, www.nacba.com, which keeps an up-to-date database with information on its member attorneys. You can also contact your local bar association, which keeps a list of referral attorneys.