Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower, stopped making payments to the lender, by forcing the sale of the asset used as the collateral for the loan. The foreclosure process as applied to residential mortgage loans is a bank or other secured creditor selling or repossessing a parcel of real property after the owner has failed to comply with an agreement between the lender and borrower called a “mortgage” or “deed of trust”. Commonly, the violation of the mortgage is a default in payment of a promissory note, secured by a lien on the property. When the process is complete, the lender can sell the property and keep the proceeds to pay off its mortgage and any legal costs, and it is typically said that “the lender has foreclosed its mortgage or lien”. If the promissory note was made with a recourse clause and if the sale does not bring enough to pay the existing balance of principal and fees, then the mortgagee can file a claim for a deficiency judgement. In many states in the United States, items included to calculate the amount of a deficiency judgment include the loan principal, accrued interest and attorney fees less the amount the lender bid at the foreclosure sale.
How to stop foreclosure
Bankruptcy stops collection activity, including foreclosure, but whether it will permanently stop it will depend on the type of bankruptcy you file and your ability to catch up on arrearages and make ongoing mortgage payments. If you’re facing foreclosure, it’s important to act quickly, and in most cases, you’ll want to contact a knowledgeable bankruptcy attorney who can help you evaluate your options. Filing a bankruptcy stops the foreclosure process because an order called the automatic stay prohibits the foreclosure proceeding from going forward as long as you file before the auction takes place. What will happen next will depend on the particular bankruptcy chapter that you file.
Foreclosure and Chapter 7 Bankruptcy
A chapter 7 doesn’t have a mechanism that allows you to catch up on late payments, so, while it might buy you some time, it won’t help you save the house. Even then, the stay might not protect you for the duration of the bankruptcy. The lender can ask the court for permission to proceed with the sale by filing a motion to lift the automatic stay. If the court grants the motion, the foreclosure proceeding, including the sale, can go forward.
If you aren’t planning to keep the house, but just need more time to get moved, this chapter can buy you an extra 2-4 months to do that. Most importantly, if you file Chapter 7 bankruptcy, you won’t owe the mortgage debt once you get your discharge, and the bank won’t be able to come after you for a deficiency balance (the amount left owing on the note after the auction).
Also, by filing Chapter 7 bankruptcy before the sale, you’ll be able to sidestep any potential tax liability you might incur if the bank forgives the deficiency balance (such forgiven amounts get taxed as income).
How Chapter 13 Bankruptcy Can Help
A chapter 13 filing will also put the automatic stay in place and you’ll have the added benefit of being able to make up missed payments (arrearages) over the course of your three to five-year repayment plan. If you have enough income to pay your regular mortgage payment, plus the arrearage (spread out over three to five years), then you’ll be able to bring your loan current and keep the house.
If your house is worth less than the balance of your first mortgage, you might be able to strip off any junior mortgages (such as a second or third). If you have more than one mortgage, it is a good idea to find a knowledgeable attorney to help you because stripping off a mortgage requires you to take extra steps.
Do I qualify for bankruptcy?
Almost any person or business can file for bankruptcy.
An eligible bankruptcy filer must have a permanent residence (domicile), own property, or have a place of business located in the United States. The filer must also complete a financial counseling course (although some filers are exempt from this requirement). U.S. citizenship and insolvency are not prerequisites of a bankruptcy filing.
Can creditors continue to contact me after I have filed?
No—your creditors can’t continue to call you, send you letters, deduct money from your paycheck, or anything else, for that matter. One of the most powerful tools in bankruptcy is its ability to stop collection efforts cold. Here’s how it works.
Sometimes a creditor mistakenly calls a filer, however—but it’s rarely purposeful. In most cases you can stop the unwanted contact by giving the caller the following information:
• the bankruptcy chapter you filed (chapter 7 or chapter 13)
• your bankruptcy case number (it will appear at the top of your petition or any other correspondence that you receive from the court)
• the filing date, and
• your attorney’s name and telephone number, if you have one.
Providing this information works because your creditors know that they could face penalties if the automatic stay violations continued.
Here’s an important point to remember: If you’re filing a second Chapter 13 bankruptcy after a previous dismissal, it’s likely that the automatic stay will be good only for the first 30 days of your case. To extend it requires filing a motion with the court. If you find yourself in this situation, or if a creditor continues to violate the automatic stay, you should contact a bankruptcy attorney.
Questions for Your Bankruptcy Attorney
1. Should I file for bankruptcy to stop the foreclosure or do I have another option?
2. Does it make sense for me to try to keep my house?
3. Can I afford to pay into a Chapter 13 bankruptcy repayment plan?
4. How long does a chapter 7 stop the foreclosure?
5. How long does the total process take?
6. How long does it stay on my credit?
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