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Filing Chapter 13 Bankruptcy can stop foreclosure. In this article, we’ll take a look at this strategic move to help you assess if it’s a viable option that can help you save your home.
The Foreclosure Crisis and the Plight of the “Average Joe”
Over the last couple of years, many Americans have been facing the fact that foreclosure might be on their horizon. Looking for a way out can sometimes be complicated. The government has come up with programs like HAMP that never really panned out. Some banks offered loan modifications that had a success rate of around 5% for those who applied. What most people don’t know is they have an ace in the hole by filing bankruptcy.
A Brief Look at Filing Chapter 7 Bankruptcy to Stop Foreclosure
Filing chapter 7 bankruptcy usually will stop foreclosure temporarily. In some situations the debtor might be able to free up enough cash by eliminating all their unsecured debts, making their mortgage affordable. This all depends on how far behind the debtor is.
In this situation, to stop foreclosure, the lender might require the debtor to come up with all their back payments in order to avoid the foreclosure sale. This can get complicated and should not be attempted as a do-it-yourself project. A bankruptcy attorney should be consulted.
Filing Chapter 13 Bankruptcy: An “Ace in the Hole” to Stop Foreclosure
Americans have a true ace in the hole if they decide to file Chapter 13 bankruptcy. A Chapter 13 bankruptcy was created for people who could afford to pay back some of their debts over a period of time.
Editor Note: Learn How To Get A Home Mortgage After A Bankruptcy Or Other Major Credit Challenge.
Benefits of Filing Chapter 13 Bankruptcy to Stop Foreclosure
One of the main benefits of filing Chapter 13 bankruptcy is the ability to keep all of your property using the power of an “automatic stay” granted by the U.S. legal system.
How Recent Changes in Bankruptcy Law Affects You
To explain, in 2005 the bankruptcy code was amended to stop people who were abusing the bankruptcy system. Congress felt that many individuals had the ability to pay back their creditors at least something.
Chapter 7 bankruptcy was changed to include a means test* that required the debtor to qualify to file bankruptcy based on their income and expenses. This meant that individuals with higher incomes would be required to pay back their debts at least partially via Chapter 13 bankruptcy. Fast forward to 2008 and the collapse of the real estate market. Many individuals who previously only considered filing Chapter 7 all of a sudden saw the benefits of filing Chapter 13 bankruptcy. It was as if Chapter 13 was created just for the crashing real estate market.
As the housing market went bust, most Americans saw their home equity go out the window. Many people who bought at the peak of the market were all of a sudden upside down (underwater) drastically on their home.
For those who didn’t lose their jobs and still had a good income, Chapter 13 bankruptcy presented an opportunity to renegotiate debts.
*What is the Bankruptcy “Means Test?”
The Means Test is simply a test that determines your financial ability to repay debts. It will help you determine if you qualify to file a Chapter 7 or a Chapter 13 bankruptcy. It consists of two parts, and takes a formulaic look at your income versus your expenses. FYI, If you fail the Means Test and don’t qualify to file a Chapter 7 (where all of your debts are dismissed), you can still file for financial protection under Chapter 13 bankruptcy (where you get on a repayment plan).
What Happens When You File a Chapter 13 Bankruptcy
When filing Chapter 13, the debtor and their bankruptcy attorney are required to come up with a feasible (reasonable) repayment plan that will last anywhere from 3 to 5 years. With Chapter 13, debts are paid by priority. Secured debts (eg, car loans, home loans, etc.) are at the top of the list. Unsecured debits, eg, credit cards, are at the bottom. Why is it structured like this?
Structuring debt repayments in this manner allows debtors to prioritize their financial obligations (debts) to pay their most important ones (eg, mortgage, car loans, etc.). first. Then, if there are any leftover funds, “unimportant” unsecured debts like credit cards can get nominal amounts.
This is why and how filing Chapter 13 bankruptcy allows debtors to stop foreclosure.
Chapter 13, just like Chapter 7 bankruptcy, shares the power of the automatic stay, which means it stops all collection and legal activity creditors levy against debtors. When it comes to protecting real estate, Chapter 13 bankruptcy really shows its power and benefits.
As the conversation here illustrates, filing Chapter 13 bankruptcy can be complicated; consulting a qualified bankruptcy attorney – one familiar with the bankruptcy laws of your state/jurisdiction – his highly advised.
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About the Author: The author is a professional that formed FilingBankruptcyNow.Com which provides information for debtors considering filing bankruptcy under Chapter 7 and Chapter 13 bankruptcy and helps individuals stop foreclosure and eliminate their debt by putting them in touch with a local bankruptcy attorney.