Filing for bankruptcy might not be one of the things you would have foreseen doing as a homeowner, but this just might be the last resort option that could help you avoid foreclosure. This option can also allow you to continue staying in your house, keeping you from being homeless as you work on your personal financial recovery.
The ideal time to file for bankruptcy is when you are already at least three months behind on your mortgage payments, and other options such as refinancing or working out a new payment plan with your lender have failed. By this time, your lender would have started the foreclosure process and sent you a notification.
When you file for bankruptcy, you’ll be granted an automatic stay which directs your lenders to stop collection activity, as well as postponing of a foreclosure sale of your home, which allows you to remain in your home. While the lender can have this stay lifted, the process of doing so will take months.
It must be noted that this option of filing for bankruptcy to stop the foreclosure process only works in some and not all cases. As mentioned, creditors can file a motion to lift the automatic stay. Avoiding foreclosure and being able to still reside at your home may not happen as well if you have filed for bankruptcy too late. Lastly, the type of bankruptcy you file also matters.
Chapter 7
If you file for Chapter 7 bankruptcy, the lien on your home will not be cancelled and foreclosure on your property will not be prevented. This is because in Chapter 7 bankruptcy, the understanding is that you don’t have the financial means to pay your bills and you will be surrendering your home as collateral to pay off your financial obligations.
Chapter 13
If you wish to use filing for bankruptcy as a last ditch effort to prevent foreclosure and keep your home, file under Chapter 13 bankruptcy. You can then use the automatic stay period to restructure your obligation to your lender which will likely include paying off accumulated interest and late payment fees, as well as a new loan agreement with a new repayment period.
However, this solution only works in cases where the homeowner who has been behind in his mortgage payments still has a steady source of income indicating the capability of meeting the new monthly payments and paying them on time.
Thus, while filing for bankruptcy can indeed provide the possibility of avoiding foreclosure and eviction, you must weigh your options and capacity to stick to a new loan agreement carefully before you start the process.