Foreclosures: Using Bankruptcy to Save Your Home

Our houses are more than brick and wood; they are our homes. Often, they also are our most significant investments. Yet, more and more Americans face the threat of foreclosure as property values sink, as jobs are lost or income stagnates. Despite lower interest rates, refinancing may not be possible, or prudent, in an uncertain economy. Recent federal programs designed to alleviate this problem remain inaccessible to many homeowners. Avoiding foreclosure through renegotiation of a mortgage may be possible, but not all lenders are willing or able to provide the extent of relief a homeowner may need.

One option that can be of tremendous benefit to strapped homeowners is seeking bankruptcy protection, but many people fear the stigma that they believe comes from declaring bankruptcy. Such an attitude is understandable, but generally unfounded.  A proper use of the bankruptcy laws can assist not only in keeping a family in their home, but even make payments easier to meet over the long run.

There are two general forms of bankruptcy for individuals (or families) – Chapter 7 and Chapter 13. Chapter 7 is best for people with few assets and debts that exceed income. A homeowner who is behind on a mortgage generally will not want to pursue Chapter 7 because such a plan is not intended to help a debtor keep assets, but to wipe away mounting debt. Chapter 13, however, is designed specifically for people who have an income and assets, such as homes, but who need help restructuring their debt to make it more manageable.  

In a Chapter 13 bankruptcy, the court will compare a person’s income to such ordinary expenses as food, utilities, clothing, car payments and the like. As long as there is money left over after those bills are met, the court will determine an amount to be paid every month to the court for distribution to creditors. Over a three to five year period, those monthly payments will be used to pay back the person’s creditors, usually at some fraction of the actual debt amount.  

Past due mortgage payments can be made a part of the bankruptcy and paid off over time. Once a bankruptcy petition is filed, creditors generally cannot pursue legal action, such as a foreclosure, against a homeowner. Even foreclosures already in process will be stayed in almost all cases. For the homeowner looking for a way to get control of mounting debt and regain financial health, Chapter 13 bankruptcy protection may be a great solution.

Of course, every situation is unique and no one should make a decision on such an important question without consulting a competent, experienced foreclosure defense attorney.  He or she will be able to assess each particular situation and craft the best possible solution for someone facing financial difficulties.