Bankruptcy is a word that creates fear and shock in many. But declaring bankruptcy is nothing to be ashamed of, in fact, it can be a responsible choice for your financial future.
So, how does bankruptcy work? Can I keep my house?
Bankruptcy – what is it?
Bankruptcy laws give debtors a fresh start. This is accomplished by two important legal mechanisms unique to bankruptcy: the automatic stay and the permanent injunction at discharge. At the moment you file your bankruptcy case, an automatic stay goes into effect, which prevents creditors from taking any action to collect a debt against you or your property during the bankruptcy. Unless a creditor petitions the court for relief from the stay allowing it to resume collection efforts, demand letters, phone calls, and repossession must come to an immediate halt. This is the “breathing room” allowing for orderly case administration.
The permanent injunction is issued at discharge. A creditor named on your bankruptcy schedules and petition is permanently unable to collect that debt from you following discharge.
Homeownership and bankruptcy
You can keep your home and declare bankruptcy, as filing often avoids foreclosure. However, the bankruptcy chapter you file under, the status of past due mortgage payments and number of mortgages are considerations to keep in mind when deciding whether or not to file.
How far behind are you on house payments? Are your mortgage payments current, but are unable to pay other debts? Do you have one mortgage against your home? If you are current on your payments, filing a chapter 7 liquidation and signing a reaffirmation agreement between you and the bank is an easy way to keep your house through bankruptcy. Chapter 7 proceedings are much quicker than chapter 13, with discharge granted a few months after filing.
If you are behind on your mortgage payments or have multiple mortgages, then a chapter 13 is your best course of action. The focus will be your chapter 13 bankruptcy plan, which is a repayment contract with your creditors. Most plans run from three to five years, during which money is sent to the bankruptcy trustee who pays the creditors you named at the time the case was filed. If you have multiple mortgages against your property, and owe more than what the property is worth, then second and third mortgages can be converted from secured to unsecured debt in a process known as “lien stripping.” Unsecured debt is not repaid outside of your bankruptcy plan, so once you complete the plan and make all payments, any amount owed on the second or third mortgage is discharged. If you can manage your debt through bankruptcy and make regular mortgage payments, bankruptcy can help you keep your home and avoid foreclosure.