Chapter 13 bankruptcy and home foreclosure
Many people considering bankruptcy may also be facing potential foreclosures and should understand the relationship between the two.
Floridians who are faced with serious and unmanageable levels of debt may understandably feel very afraid and unsure of how to proceed. As the pile of bills increases and the ability to pay them is not there, many people may wonder if bankruptcy can help them. The thought of getting help through filing for bankruptcy may grow if a home mortgage lender has threatened to pursue a foreclosure sale.
Homeowners may have heard how filing for bankruptcy can prevent a foreclosure sale but is this really true? What power does a bankruptcy action actually have in the face of a potential home loss?
What can a bankruptcy filing do for a consumer?
As explained by Bankrate, filing for bankruptcy can issue what is legally referred to as an automatic stay. This essentially puts any collection activities on hold including those pertaining to mortgage arrears. An automatic stay can result when either a Chapter 7 or a Chapter 13 bankruptcy filing has been made. In this way, a debtor may be given some additional time to decide if getting back on track with mortgage payments is possible. If so, the time can be used to make a plan with that goal in mind.
What can a bankruptcy filing not do for consumers?
CNN explains that there are some powers outside the scope of a bankruptcy filing. Bankruptcy courts have no power to force mortgage lenders to amend their mortgage agreements with borrowers. This means that they cannot force banks to reduce the overall amount owed or to cut the interest rate on a particular loan. Courts can also not make banks change the length of time that a mortgage contract is set for in order to reduce the monthly payments.
Can filing for bankruptcy eliminate second mortgages?
Chapter 13 bankruptcies are used to restructure payments for secured mortgages. Home equity lines of credit and second mortgages are types of secured mortgages that may be included in these payments. Unsecured debts in Chapter 13 filings are generally repaid at very minimal levels and often eliminated altogether.
In the past, if a home’s value was less than the primary mortgage balance, a second mortgage or equity line balance was considered an unsecured debt. This allowed it to be eliminated in a bankruptcy. However, a 2015 decision by the U.S. Supreme Court made some changes to this according to Forbes. Underwater second mortgages are no longer automatically eliminated in this way.
What should debt-laden homeowners do?
Florida homeowners who feel overwhelmed by their level of debt and fear losing their homes should always reach out to an lawyer for help. Getting the right legal advice up front can give them the information they need in order to make the right decision about their homes and their futures.