Before Filing Bankruptcy to Stop a Foreclosure
What is foreclosure?
Foreclosure is the legal process by which a lien against a consumer’s property is enforced by the lender or creditor through the taking and selling.
The consumer who is facing foreclosure may panic and file bankruptcy immediately (which is not such a bad idea considering that both Chapter 7 and Chapter 13 can stop collection calls and property sale via a court issued Order for Relief) to avoid losing his/her home but there are other options for the consumer to explore.
What is an Order for Relief?
It is a court issued order that is sent out automatically after a consumer declares bankruptcy. An Order for Relief marks the beginning of a bankruptcy proceeding; the date of which determines what claims are to be administered in the development of the case. An Order for Relief includes an “automatic stay,” which demands that all collection activity be stopped. That order is applicable to all creditors and mortgage lenders even if the consumer’s house is already up for sale. The sale is going to be postponed as long as the bankruptcy is pending.
What is an Automatic Stay?
It is a court directive that halts certain creditor activities like collection of debts from a consumer that filed bankruptcy.
The automatic stay prevents:
- The beginning of law suits and its progress
- Collection calls
- Garnishment or levies
- Repossessions
- Foreclosure sales –
In Chapter 7 Bankruptcy, although the stay can prevent immediate foreclosure, it may also expire when the consumer gets discharged, and the creditor may have the right to proceed. This is assuming that there is NO non exempt equity in the property for the bankruptcy estate or there are no exemptions on properties like valuable jewelries, designer clothes, electronic gadgets, expensive collections, and even cars.
In Chapter 13, the stay remains until the end of the Chapter 13 plan, but only for any past due payments you have up until the time you file. If a consumer continues to miss payments on their mortgage, even in a Chapter 13, the lender is reserved the right to foreclose on the property.
Why not file bankruptcy right away?
The consumer must make sure first that he/she have exhausted all the other possible options before deciding on bankruptcy, because bankruptcy:
- Stays on the credit report for seven to ten years.
- It affects future credit applications negatively.
- It is long and tedious and….
What are these possible options?
The consumer should contact the mortgage lender immediately after he/she realize that a payment was missed. The sooner that it is done, the better, because the lender might think that the skip was deliberate and proceed to foreclosure. Let the mortgage lender know of the reasons for the missed payment and try to negotiate other payment plans. The consumer would find out that most lenders are most likely going to be willing to negotiate because they would rather have the consumer pay what they can afford than face bankruptcy, because if the consumer files for bankruptcy it may mean a loss of profit for them. All of the options listed below require that the consumer be in constant contact with the lenders.
1. The consumer can pitch the following to the lenders (if his/her financial issues are temporary):
Reinstatement – it is an option available to consumers who can demonstrate to a lender that they have available funds to pay back the outstanding balance on their mortgage within 24 months. The consumer can achieve this through a combination of lump sum payments, and/or payments distributed over 12 to 24 months, plus the regular mortgage payment.
Forbearance- is a reduction or suspension of payments for a period of time to allow the consumer to make up the deferred payments
A repayment plan- involves paying a full payment on past due credit over a period of months, plus making a partial payment on the past due balance each month. A repayment plan requires of the consumer a cash contribution equivalent to 30-50% of his/her total arrears or the total of amount of late payments, bank fees plus the attorney’s fees.
2. If the consumer’s money problems are going to be long term the consumer can try to:
- Sell the house
- See if the mortgage company will allow assumption, a pre-foreclosure sale or short sale, or the deed-in-lieu of foreclosure.
If it happens that both parties are unable to reach an agreement, the consumer may contact the HUD approved foreclosure counseling agency for assistance and counseling regarding his/her case. Those are usually free of charge.
What is HUD?
HUD stands for Housing and Urban Development. It is a cabinet of the United States that extends help people of low and mid-level incomes to acquire loans that can be used to purchase a house. HUD also supports organizations that offer advice on foreclosures.
More resources about foreclosures and bankruptcy: