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Will Declaring Bankruptcy Stop a Foreclosure
Losing your home is always a scary proposition. If you find yourself facing impending foreclosure, there are steps you can take to protect yourself. One of these is bankruptcy. But before you hire an attorney and jump on the bankruptcy bandwagon, take the time to learn more about how this process can protect you from foreclosure.
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The first step in understanding the role of bankruptcy in preventing foreclosure is to fully understand what foreclosure is and how it occurs. Foreclosure is a legal process wherein a homeowner loses his or her home after falling behind in mortgage payments. After the mortgage payments have been missed several times, usually over a period of three to four months, the lender will begin the foreclosure process. The end result of foreclosure is eviction and the repossession of your home by your lender.
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The Automatic Stay
When you file Chapter 7 or Chapter 13 bankruptcy, the courts will issue an Order of Relief. This order grants an automatic stay on your creditors, requiring them to stop their collection actions immediately. In the case of foreclosure, this legally postpones the sale while the bankruptcy case is in the courts. For the next three to four months, you can live in your home as you did before. While it is not a permanent solution, the automatic stay does stop foreclosure for a little while.
However, there are instances where the automatic stay is not going to stop the process. Some state laws require lenders to give several months of notice to distressed homeowners before starting the foreclosure process. If you have already received this notice and choose to file for bankruptcy, your lender may be able to file a motion to lift the automatic stay, and often the courts will grant this. If they do, the foreclosure sale will continue as scheduled or after a much shorter delay.
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Chapter 7 Bankruptcy and Foreclosure
If you file Chapter 7, the end result will be the discharge of most of your debts. Chapter 7 will grant the automatic stay, but once you have finished the process and your debts will be discharged, the foreclosure process will begin again. The bankruptcy process may cancel your liability for your mortgage debt, but it does not change the fact that the home is the security for that loan. The bank retains the legal right to repossess the home if you are unable to pay what you owe. Unless you can make up your missed payments and set up a workable solution with your lender to bring your loan current, Chapter 7 will not stop foreclosure.
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Chapter 13 Bankruptcy and Foreclosure
If you wish to stop foreclosure altogether using bankruptcy, then Chapter 13 is the form you want to file. Under Chapter 13, you enter into a repayment period that lasts three to five years. During this time, you will maintain your current mortgage payments while working to pay back what you owe at the same time. As long as you are successful, foreclosure will not continue.
Chapter 13 may also free you from your second or third mortgages, allowing you to re-categorize these as unsecured debt, which is the last priority under your repayment structure. In many instances, these low-priority debts are discharged at the end of the repayment period, provided the debtor maintains the required payments. This re-categorizing occurs when the entire value of the home is used to secure the primary mortgage. If this is the case for you, you may be able to remove the need to pay any second or third mortgage payments, allowing you the financial resources to make the primary loan current and protect your home from foreclosure.
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Alternatives to Bankruptcy
Bankruptcy is not the only way to stop foreclosure, and for many homeowners it is not the most advisable either. Lenders usually lose money when they pursue foreclosure, so in many instances they are willing to work with borrowers who have fallen on difficult times to avoid this expensive process.
One option some lenders may offer is a short sale or selling the home for less than what is owed. Lenders lose less money during a short sale than during foreclosure, so it is a beneficial option for them.
Loan modification and refinance programs assisted by the federal government may make it possible for homeowners to once again be able to afford their mortgage payments. Ask your lender about any of these options that may fit your situation.
Loan forbearance is another option to consider. Sometimes, if you have kept up your loan payments over a period of time and simply have an unusual circumstance you are facing, lenders will be willing to delay or reduce your payments for a short period of time in order to give you the chance to bring the loan current again.
The key to getting this type of help is starting early. As soon as you know that you are facing a problem, contact your lender. You should only consider bankruptcy after you have pursued all other options for stopping foreclosure, because bankruptcy has a serious, long-term impact on your credit score.
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American Foreclosure Specialists. “Loan Forbearance." http://www.afscanhelp.com/loan-f.cfm