Many Americans have fallen behind on their mortgage payments. Even though the Northern Virginia area was spared the brunt of the economic fallout due to the real estate crash, many in Fairfax, Alexandria, and other communities in that area are facing the threat of foreclosure. If you're having problems paying your mortgage, your strategy should include assessing whether and when bankruptcy might be right for you.
Bankruptcy Can Temporarily Save Your Home
If your bank has started the foreclosure process, filing either a Chapter 7 or Chapter 13 bankruptcy will temporarily help you keep your house. Once you file, the bankruptcy court automatically issues an order for relief, granting you an automatic stay. An automatic stay directs your creditors to immediately cease their collections attempts. This is a postponement of any foreclosure activity. If a foreclosure sale has been scheduled for your home, it will be postponed by law until the bankruptcy is finalized, which usually takes about three to four months. An automatic stay and the filing of a bankruptcy gives you serious leverage against your lender, which you can use to get a loan modification or some other long-term solution that can help you keep your home.
Unfortunately, the automatic stay isn't foolproof. Your lender may file a motion to lift the stay, in which the lender asks permission from the bankruptcy court to continue with the foreclosure process. If the lift of the stay is granted, you will not have the full three to four months. But if the lender is slow in filing the motion to lift the stay, the bankruptcy will still postpone the foreclosure sale by a month or two or more, giving you some extra time to spend in your home, catch your breath, and figure out your next step with your bankruptcy attorney.
The automatic stay also won't stop the ticking of the clock on a foreclosure notice. Often, there are laws that require lenders to give homeowners a certain amount of notice before selling the property. If notice has already been given before the bankruptcy filing, the lender may file a motion to lift the stay once the notice period ends and ask the court for permission to schedule the foreclosure sale.
Chapter 13 v. Chapter 7 Bankruptcy
A Chapter 13 bankruptcy will restructure your debts and set up a repayment plan to pay off the past due payments or arrearage, but you will need sufficient income to pay both your past due payments and your current mortgage payments. Provided you can make these payments, you will avoid foreclosure and be able to stay in your home. A Chapter 13 bankruptcy can also help eliminate underwater second and third mortgages because these are considered to be unsecured loans, unlike your first mortgage, which is secured by the entire value of your home.
A Chapter 7 bankruptcy will discharge your debts almost immediately, but you may still lose your home.
Bankruptcy may or may not prevent the loss of your home, but a bankruptcy may help you with your long-term financial planning. Bankruptcy will stop you from losing more money and wasting more of your time, and you will be able to start rebuilding your credit immediately.
Key Facts to Remember
The foreclosure process takes time and most creditors do not begin foreclosing until the homeowner is two to three months behind. This gives the homeowner time to consider alternatives to foreclosure and bankruptcy, such as loan forbearance, short sale, or deed in lieu of foreclosure.
An automatic stay can keep you in your home for several months following the filing of your bankruptcy, but lenders can ask the court to lift the stay and proceed with your home foreclosure. Consulting with a bankruptcy attorney can mean the difference between staying in your home for several months and facing immediate foreclosure.
Good communication with your lender is critical when faced with a foreclosure. Both bankruptcy and foreclosure can be avoided under certain circumstances.
Filing for bankruptcy not only provides some breathing room to plan your next move; it also provide serious leverage against your lender to get a favorable resolution, such as a loan modification.
Even if bankruptcy cannot ultimately save your home, it can be the first step towards building good credit for the future.