Mar 02, 2011

Bankruptcy and Foreclosure

The most common question I get these days is whether filing Chapter 7 or Chapter 13 bankruptcy will stop a foreclosure.

Chapter 7 Bankruptcy and Foreclosure

The simple answer is, Chapter 7 bankruptcy can keep you in your home for an additional two to three months, and that's about it. But, and it's a big "but," because you will be getting free shelter when you aren't paying your mortgage, a three month delay can be worth three times what you would be paying for a monthly rental, or a total of between $4,000 and $6,000 for the typical family.

To learn more about what happens to your home when you file for Chapter 7 bankruptcy, read Nolo's article Your Home in Chapter 7 Bankruptcy.

Chapter 13 Bankruptcy and Foreclosure

If you file a Chapter 13 bankruptcy and can propose a feasible repayment plan, you may be able to stave off the foreclosure for up to five years. Just how long will depend on your income and basic living expenses, and how far behind you are on your payments.

Even if can't propose a feasible plan, you may be able to put off the foreclosure for a much longer time than would be the case under Chapter 7. The rub is that you will probably need an attorney to achieve this result. But because you aren't paying your mortgage you can divert some of your "shelter money" to hiring an attorney, who will typically charge between three and four thousand dollars to handle a Chapter 13 bankruptcy. While this may seem like a lot, it likely will be only two or three months worth of mortgage payment and you'll likely come out ahead in terms of the total amount saved by staying in your home payment free.

To learn more about what happens to your home in Chapter 13 bankruptcy, read Nolo's article Your Home in Chapter 13 Bankruptcy.

Chapter 13 bankruptcy can have other advantages over Chapter 7. Bankruptcy attorneys are starting to successfully use Chapter 13 procedures to challenge the very validity of the mortgage, which means you may have a shot either at never having to pay the mortgage or at least being able to negotiate lower principle and payment amounts. You also can use Chapter 13 to get rid of second mortgage liens when your home's value is not enough to provide security for the amount owed on the second mortgage (called mortgage lien strip-offs).

To learn more about the interplay between bankruptcy and foreclosure, read Nolo's article How Bankruptcy Can Help With Foreclosure.