If you are behind on your mortgage payments, and considered to be in default by your lender, the lender may initiate foreclosure proceedings against you. One option you may have is to file for protection through the U.S. Bankruptcy Court. By filing for protection under one of the bankruptcy chapters, you may be able to protect your home, or discharge the debt remaining after the home is foreclosed on by the lender.
Foreclosure Proceedings
State laws, as well as the contract you entered into with your lender, will determine the exact procedures your lender must follow to foreclose on your home; however, there are common steps. The lender must usually notify you of the intent to foreclose and afford you the opportunity to cure the default. The lender will then petition the court for the right to foreclose. Once an order to foreclose has been granted, the lender will advertise the sale of the home at public auction. After the sale, the money paid by the buyer will be applied to the balance owed and any additional balance will be entered as a deficiency judgment against you.
General Bankruptcy Procedures
Unlike foreclosure, bankruptcy is governed by federal law, which means the procedure is the same in all states. The only difference between states is what state exemptions are available to a debtor. To begin a bankruptcy you must file a petition under the appropriate chapter. The court will enter an automatic stay as soon as you file the petition. The automatic stay prevents creditors from attempting to collect on debts. It will also serve to halt the foreclosure proceedings for the time being. The automatic stay remains in effect until discharge or dismissal of the bankruptcy unless a creditor files a motion for relief from the stay and the court grants the motion.
Chapter 7
A Chapter 7 bankruptcy is frequently referred to as a "liquidation." You must pass a means test to file a Chapter 7 petition. Basically, you must have low income and few assets. If you have a considerable amount of equity in your home that is above the exemption amount allowed in your state, then you may not want to file a Chapter 7 petition because you will be required to sell the home to satisfy creditors. Under a Chapter 7, you have two options for a mortgage debt. You may reaffirm the debt with the lender if the lender will agree to the reaffirmation. By reaffirming, you essentially sign a new contract agreeing to pay the mortgage. The debt is not included in your discharge if you reaffirm. If you do not feel you will be able to make the payments after discharge of the bankruptcy, then the home will be liquidated, or sold to pay off the debt. Any remaining balance after the property is liquidated will be discharged.
Other Chapters
If you file under another chapter that requires a reorganization plan, then your mortgage can be included in the reorganization plan. A reorganization plan allows you to pay off the majority of your debts over an extended period of time, usually three years. You are not required to pay off your mortgage in three years, but you will be required to keep your mortgage payments current during the time you are under a bankruptcy reorganization plan. At the end of the plan, a discharge is ordered. If you plan to file a chapter that requires a reorganization, it is best to continue to make your mortgage payments after you file even though the automatic stay is in place since you plan to keep your home under the plan.
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