Using Bankruptcy to Save Your Home and Avoid Foreclosure

By Dan Wallis

During this era of record-high home foreclosure and unemployment rates, many Americans are behind on their mortgage payments and are understandably concerned about losing their family home. 

Many families who are facing foreclosure find that either their mortgage company will not work with them to stop a foreclosure, or wants a very large cash payment in order to modify their mortgages. Unfortunately, the federal government’s loan modification program has been a dismal failure, with few distressed homeowners finding any relief.

Under current bankruptcy laws, however, an individual or family may be able to stop the foreclosure of their home. Many individuals and families are able to save their homes from foreclosure by filing for Chapter 13 bankruptcy, which is debt reorganization under bankruptcy law. In most cases, filing for Chapter 13 stops the foreclosure process, preventing eviction and giving the homeowner time to file a plan to reorganize his or her debts. Without the looming threat of foreclosure and eviction, homeowners can work with their attorneys to create a plan that allows them to affordably reorganize their debts and save their homes.

Chapter 13 allows the homeowner to create a plan to repay the house payments that were missed prior to bankruptcy over three to five years. If the homeowner has fallen behind on property taxes, the property taxes can be paid over time under the Chapter 13 plan as well. Normally the homeowner makes one payment to a court-appointed trustee, who pays pre-filing debts included in the plan from the payment. After filing for Chapter 13, the homeowner then resumes making the regular monthly payment on the home, while the arrears are paid to the mortgage company through the trustee.

Chapter 13 can make it easier for a homeowner to resume making house payments by restructuring other debt as well. Credit cards, medical debt, personal loans and other unsecured debts can be paid through the plan, but may not have to be paid in full, depending on the homeowner’s income and family size. Many chapter 13 filers pay only a small percentage on these debts, with the balances being “discharged” or forgiven by the court when the plan is successfully completed. Some car loans can be restructured to reduce the balance of the loan to the value of the vehicle, and to reduce the interest rate.

A homeowner who is facing foreclosure may be able to use the protections of bankruptcy to allow them to catch up on missed payments over a reasonable period of time and protect the equity they have in their home.

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