Using bankruptcy to stop a foreclosure

08 Aug Using bankruptcy to stop a foreclosure

When someone gets behind on their mortgage, which is happening with much more frequency these days, and their mortgage company won’t work with them, bankruptcy may be an option. There are a lot of factors to consider before one files for bankruptcy. First, if you didn’t have enough income to pay your regular monthly mortgage payment and none of your other circumstances have changed – bankruptcy probably won’t work for you. Bankruptcy doesn’t change or lower your monthly mortgage payment (there are unusual circumstances where it could – but they are very rare). And if you have an Adjustable Rate Mortgage (ARM loan), your mortgage payments will change according to the terms of your loan. Chapter 13 bankruptcy only allows you to spread out your missed payments – usually over three to five years. Chapter 7 will not give you an extended time period to make up the missed payments. Neither chapter will change the terms of your loan or lower your payments.
The foreclosure process is state specific, therefore, you need to consult with an attorney in your state to verify the process that affects your home. For instance, in some states, it takes many months for a mortgage company to foreclose if the state is a judicial foreclosure state (meaning the mortgage company needs a court order to proceed with the foreclosure). In non-judicial states, it may take only a few months. And some states, like Texas, have both judicial and non-judicial foreclosures depending on the type of mortgage loan.
Unfortunately, every month I have to advise one or more people whose homes are about to be foreclosed on that bankruptcy won’t help them. Usually it is because their expenses far exceed their income which means they don’t qualify for a Chapter 13 bankruptcy. Many persons come in with the misconception that a bankruptcy will restructure the loan and lower their monthly payments. Sadly, this is not the case.

If your home is about to be foreclosed, consult a lawyer in your area to find out what your rights are and what your options are.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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