Filing bankruptcy can help you stop foreclosures, so that you can stay in your home.
Written by Attorney Jonathan Petts.
Updated August 7, 2020
If you are dealing with a potential foreclosure you are not alone. According to the Mortgage Bankers Association, every three months 250,000 new families enter foreclosure. Around 1 out of every 200 homes are likely to be foreclosed upon.
There are many different ways you can deal with foreclosure. For instance, you may be able to set up a payment plan with your creditor or file for bankruptcy. You should figure out the best solution when dealing with your own potential foreclosure.
This article will give you an overview on some of the basics of foreclosure as well as ways of dealing with it. You will learn how bankruptcy, and other alternatives, can be used to help you deal with foreclosure.
Foreclosure happens when someone defaults on their mortgage and then the lender engages in the legal foreclosure process. Generally, there are three things to keep in mind when faced with a potential foreclosure.
First, there are specific procedures your lender has to follow in order to foreclose on your house. There are federal and state laws that govern how your lender can foreclose on your house. It is important to know that if your lender does not follow those procedures you may be able to sue and stop the foreclosure process.
Second, you may be eligible to a “right of redemption” in order to keep your house after foreclosure. The right of redemption allows you to keep your house by paying the foreclosure sale price or repaying your mortgage to your lender after the time of sale. The specific rules about how this works depends on what state you live in.
Third, depending on where you live you may be on the hook for a “deficiency judgment” if your lender successfully forecloses on your house. When your house is sold at a foreclosure sale, the difference between the sale price and your mortgage debt is called a “deficiency.” In some states, you may still owe your lender for the “deficiency” even though they foreclosed and sold your house.
Some states, like Arizona, have laws protecting have laws that protect homeowners from deficiency judgments, which you may want to take advantage of if available where you live. It is important to find out if there are similar laws where you live to make an informed decision on how to deal with your foreclosure.
The key foreclosure basics takeaway is that the process varies between states. You will want to learn the basics of the foreclosure process in your state as well as if you are liable for any deficiencies. You should try to find out how the foreclosure process works in your state so you can make the best decision for you when dealing with a potential foreclosure.
Your Options to Deal with Foreclosure
There are many different ways to deal with a foreclosure. This sections provides an overview of some options that may be helpful for dealing with your own foreclosure situation.
Talk with your lender
You may be able to talk with your lender to either refinance your mortgage or set up a repayment plan in order to avoid a foreclosure. You may be able to negotiate with your creditor in order to avoid foreclosure.
Depending on your situation, the best course of action may be to reach out to your lender to stave off a potential foreclosure.
The Mortgage Forgiveness Debt Relief Act of 2007
Congress passed a law in 2007 called the Mortgage Forgiveness Debt Relief Act of 2007 designed to help mortgage owners deal with mortgage debt and related taxes. Normally, discharging debt through foreclosure or refinancing a mortgage can be counted as income for tax purposes. However, if you borrowed money from 2007 to 2016 you may be able to take advantage of this law when dealing with a potential foreclosure.
Under this law, up to $2 million of forgiven mortgage debt can be exempted from taxable income. Prior to this law, forgiven mortgage debt could count as taxable income. If you are dealing with a potential foreclosure, you should see if you qualify for protections under this law.
Even if you don’t qualify for this specific law, you should know that debt discharged by bankruptcy are not considered taxable income.
You may also want to consider filing for bankruptcy as a way to deal with foreclosure. You may be able to use bankruptcy as a way of dealing with mortgage debt before the foreclosure process begins. If you have a lot of mortgage debt, you may want to consider filing for bankruptcy before your lender starts a foreclosure proceeding.
Likewise, there are also benefits for filing for bankruptcy after foreclosure starts. Filing foreclosure will put an automatic stay on foreclosure proceedings, which can buy you time in order to deal with your situation.
In short, depending on your situation there are advantages to filing for bankruptcy both before and after your lender initiates foreclosure proceedings. If you are thinking of using bankruptcy as an option to deal with foreclosure you should think about what would be the best time in the process to file for bankruptcy.
Pros and Cons of Bankruptcy and Foreclosure
The biggest advantage to dealing with foreclosure by filing for bankruptcy is that you can get more time in order to deal with the foreclosure. When you file for bankruptcy, the court will put an automatic stay on any ongoing foreclosure proceedings. Generally, that means there will be a three to four month window where foreclosure proceedings will be put on hold so the Court can evaluate your bankruptcy case.
It should be noted that your creditor will have an opportunity to challenge a potential stay on foreclosure proceedings. Be prepared to respond if your creditor decides to ask the court to lift the automatic stay. If you do not, then foreclosure proceedings may begin again.
The kind of bankruptcy you file for can affect whether or not you keep your home after foreclosure. Individuals tend to file for either Chapter 7 or Chapter 13 bankruptcy. When considering bankruptcy as a way of dealing with foreclosure, you should consider the kind of bankruptcy you use in making your decision.
There are a few key differences between Chapter 7 and Chapter 13 bankruptcy when it comes to foreclosures.
If you file for Chapter 7 bankruptcy, you may be more likely to lose your home because secured debts, such as mortgages are exempt from Chapter 7 bankruptcy. This means you might lose expensive property if you file for Chapter 7 bankruptcy in order to deal with foreclosure.
Filing for Chapter 7 bankruptcy might not get rid of a lien you have on your property. That could leave you in a situation where you successfully file for Chapter 7 bankruptcy, but still allow your creditor to foreclose on your home. Make sure you have a good sense of the kind of debt you have when deciding if to file for bankruptcy to deal with foreclosure.
If you file for Chapter 13 bankruptcy you may be better able to save your home from a potential foreclosure. Many people file for Chapter 13 bankruptcy for strategic reasons in order to delay foreclosure proceedings. Filing for Chapter 13 bankruptcy may buy you a lot of time, in some cases years, to deal with foreclosure.
You should keep in mind that even though Chapter 13 bankruptcy may give you a lot of time to deal with your foreclosure, you will still likely have to agree to a payment plan with your creditor. If you manage to meet those payments, you may be able to keep your home safe from foreclosure.
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If you are dealing with mortgage debt you are not alone. Not only are many other Americans dealing with the same problem, but there are solutions available for you to use to help stave off a potential foreclosure.
If you think bankruptcy might be the right option for you, it is important to understand how it can benefit and impact your particular situation and whether or not the timing is right for you to file.
Whether you’re filing with an attorney, legal aid, or on your own with a service like Upsolve, Chapter 7 bankruptcy can be a great way to help you get a fresh start. We love what we do, and we want to help you and your family become debt-free.
Filing on your own? Our free screener can help you see if Chapter 7 and Upsolve might be a good fit.