Bankruptcy should be considered a last-resort option, but it can help significantly by bringing foreclosure proceedings to a halt, ending harassment from debt collectors, and giving you time to reorganize your finances. The best time to consider bankruptcy is when you have fallen at least two months behind on your mortgage payments, and preferably before a trustee sale has been scheduled.
Halt Foreclosure with an Automatic Stay
If you file for bankruptcy before the foreclosure sale of your home, you’ll receive what is called the automatic stay, which offers you protection from foreclosure. This means you can stay in your home and creditors cannot come after you for money until your case is discharged, or the lender files a motion to remove the stay to proceed with a foreclosure.
Bankruptcy and Foreclosure
Foreclosure with a Chapter 7 Bankruptcy
Chapter 7 bankruptcy rules state that you do not have the financial means to pay any of your bills. When your personal bankruptcy is discharged, you are released from your obligation to pay your debts. However, Chapter 7 bankruptcy rules do not prevent foreclosure on your home because the lien on the home survives a bankruptcy discharge. This means that, although the lender cannot come after you personally for any deficiency balance, the lender can foreclose on the property (your home) that secures the lender’s lien. So, when filing Chapter 7, the understanding is that you are likely going to surrender your home to the bank. If your intentions are to keep the home, then a Chapter 13 filing would be appropriate.
Foreclosure with a Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows you to repay all or a portion of your debts under the supervision and protection of the bankruptcy court. Essentially, Chapter 13 bankruptcy is a court protected repayment plan, usually lasting three to five years. In most Chapter 13 bankruptcy cases, there is an opportunity to keep your home and prevent foreclosure by curing any default in your mortgage payments over the course of the plan. To protect your home from foreclosure in a Chapter 13 plan, you must be able to do the following:
- Resume making your mortgage payments due after the bankruptcy is filed.
- Have sufficient income to pay for your living expenses, including utilities, insurance, and all other necessary expenses.
- File a plan that provides payment of all mortgage payment arrears and late charges that were due prior to filing.
With my careful guidance, and your ability to make the required plan payments, you can emerge from bankruptcy with your home still in your possession.
Tax Liability and Foreclosure
Foreclosure may trigger tax consequences to you. Today’s current law may hold you liable for any debt forgiveness in the form of taxes on such forgiven debt. To avoid such a liability, you may need to consider bankruptcy. Any difference between what people borrow and what they repay is considered income. Tax laws treat any type of debt forgiveness as a financial benefit, even if it comes at the expense of your home. The two exceptions to such debt forgiveness income is filing a bankruptcy before the foreclosure, or if a bankruptcy is not filed, a determination that you are technically insolvent under the tax code.
Retaining legal assistance from an honest and caring bankruptcy attorney who is skilled and experienced in the field of foreclosure defense may be your best chance at financial relief. I personally handle all bankruptcy cases using empathy and experience. Call my office today for a free consultation.