Bankruptcy Options to Avoid Foreclosure

Defaulting homeowners must consider bankruptcy as a last resort to save their home from foreclosure. A bankruptcy will remain on your credit report for a period of around 10 years and may only be used once every 6 or 2 years. However, a bankruptcy may be the only alternative for homeowners looking to stop or stall a foreclosure proceedings. After a bankruptcy is filed, the court issues a”automatic stay” ordering all lenders to stop collections actions instantly. For houses scheduled for a foreclosure sale, the automatic stay legally stalls the purchase date for around three or four months. However, in states where creditors are expected to give advance notice prior to a foreclosure sale (in California, creditors are required to give at least 90 days of note ), an automatic stay may not have the ability to stall the process.

Chapter 7 Bankruptcy

A chapter 7 bankruptcy is often known as a”liquidation” bankruptcy. When filed, all of the debtor’s assets move into the hands of the bankruptcy court and also a trustee will be assigned to discharge some or all debts, as well as sell any resources to satisfy debt obligations. Some (if not all) assets could be exempt from a liquidation sale. In California, resources necessary for the service and maintenance of the debtor (such as furniture and other household products ) are generally exempt. Note that a chapter 7 bankruptcy does not stop a foreclosure, but instead stalls it normally for a period of 3 to 4 weeks.

Chapter 11 Bankruptcy

A chapter 11 bankruptcy provides companies (or people who don’t meet the asset/debt limitations of chapter 13) an chance to reorganize their financial affairs while maintaining possession of all resources and business operations. Under chapter 11, the debtor is generally given the exclusive right to create his own reorganization plans, which should ultimately be accepted by the bankruptcy court. The accepted plan may include provisions whereby the borrower can recuperate assets and remove burdensome contracts. Additional a chapter 11 allows a borrower to negotiate repayment plans with creditors. With this principle, a chapter 11 bankruptcy is very powerful in real estate cases where the debtor is able to get more time to pay off debts by essentially forcing a mortgage lender into a loan modification.

Chapter 13 Bankruptcy

Filing a chapter 13 bankruptcy will stop a foreclosure provided the debtor submits a feasible repayment plan approved by the bankruptcy court. The debtor must prove that she is able to maintain present mortgage obligations under the program, along with arrears for the next 3 to 5 years. Note that junior debts like second mortgages are generally discharged with a chapter 13 in a process called”lien stripping.” Additional debtors may prevent tax liabilities arising from forgiven debt along with having the ability to keep ownership or reclaim repossessed assets. Chapter 13 bankruptcy is a powerful tool to utilize in nonrecourse states (such as California) where the lender does not have to sue in court to market a home through foreclosure. To be eligible for a chapter 13 filing, the borrower should pass a”means test” proving sufficient income to pay off debts under the repayment program and secured debts less than $1 million (roughly $336,000 for unsecured debts).

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