The combination of a downturn in the real estate market and aggressive lending policies has caused millions of homeowners to find themselves in one of these situations:
- You are current on your mortgage payments but your ARM is about to go up and you won't be able to afford payments in the future. You try to renegotiate the ARM but with no luck.
- You have a little equity in your home that you would like to pull out, but you can't get a refinance loan and you are having great difficulty in making your payments.
- You can no longer make your mortgage payments and you are "upside down" on your home--you owe more than the property can be sold for.
The bad news is, in all of these situations you are facing foreclosure. The good news is you may be able to use bankruptcy to delay foreclosure and remain in your home for a year or more without paying one cent on your mortgage. If you are able to save all or a portion of the mortgage payments that come due during this period, you can emerge from bankruptcy with a tidy sum that will help you start over financially. Let's see how this works.
Assume you can no longer afford your mortgage payments or you are upside down on your house. You've accepted the fact that you'll need to find another place to live--but you hope to put if off as long as possible. In California and many other states, you can typically fall three months behind before a statutory foreclosure process begins by your being served with a Notice of Default--which states that your home will be sold after three months if you don't get current or otherwise deal with the problem in that time. This means you can go a total of six months without paying your mortgage before you are faced with the prospect of an involuntary sale of your home (that's three months before the Notice of Default is mailed to you and another three months before the foreclosure sale itself is scheduled). This six months' delay will allow you to save up some money from not paying your mortgage--money that will allow you to rent new quarters.
To buy more time, if, just before the foreclosure sale you file a Chapter 7 bankruptcy, the sale will be stalled while your case is open--roughly three to four months--unless the lender files a request with the court seeking permission to proceed with the sale. Either way, it's safe to assume a Chapter 7 bankruptcy will get you an additional three months delay before you have to leave your house. Another chance to add to the nest egg that will prove useful in adjusting to your new fresh start.
A way to buy even more time is to initially propose a feasible Chapter 13 plan (which requires a steady income that exceeds your expenses by the amount necessary to meet the Chapter 13 repayment requirements) and then convert your case to a Chapter 7 bankruptcy. This will probably delay the foreclosure for at least six months.
And here's the kicker. Even after your home is finally sold at foreclosure, it may just sit there for several more months--with you in it--before the new owner finally gets around to getting you out. If you really want to stay to the bitter end, know that the new owner will have to first serve you with a 30-day "notice to quit" before going to court to obtain an eviction order, and the court eviction process typically takes a couple of months before you absolutely have to move.
But it's not a good idea to have a judicial eviction action on record when you'll be seeking to rent a dwelling--so to be conservative, figure filing for bankruptcy will give you an additional three months of free housing after the foreclosure sale. All together, through a combination of your state's foreclosure laws and federal bankruptcy law, you can live in your home "rent free" for about a year and save up a financial cushion so you won't get into this position again.
To take full advantage of the bankruptcy laws in the manner described here, you will likely need the services of a bankruptcy lawyer. While you can normally file bankruptcy without a lawyer, and you always have the right to do so, a good knowledge of the bankruptcy laws is called for if the primary reason you are filing is to amass a nest egg in the manner I suggest. For example, whether you can keep all of the money you save before you file for Chapter 7 bankruptcy will depend on your state's property protection laws (exemptions). A lawyer is likely to charge a lot for orchestrating this type of strategy--typically between $2,000 and $4,000. However, because you are paying nothing for your shelter for up to a year, it may be worth your while, and you'll probably gain more time in your home than if you do it yourself.
To find out more about attempting to save for retirement while simultaneously trying to get out of debt, try reading Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom, by Attorney Robin Leonard (Nolo).