Usually, when a lender begins foreclosure proceedings, homeowners have missed several mortgage payments. The goal for the lender is to hold a foreclosure auction, sell the home, and recoup some or all of their loss.
The foreclosure process tends to be lengthy, and this gives you time to pursue alternative options. You can, for example, try to renegotiate your mortgage terms, organize a short sale (i.e. the proceeds will be less than the debt, but lien holders can agree to accept a lower amount), or see about a deed in lieu of foreclosure (i.e. you convey all the interest in your property to the lender to satisfy the loan). Filing for bankruptcy may also be an option, but there are a few considerations to keep in mind.
What You Need to Know About Bankruptcy and Foreclosure
When you file for Chapter 7 or 13 bankruptcy, the court issues an injunction called an “automatic stay.” This means that creditors and collection agencies cannot attempt to collect any debts. They can’t call you, email you, or send communications via mail, nor can they file lawsuits, file a lien, or garnish your wages. In non-legal terms, an automatic stay is breathing room.
Under the automatic stay, mortgage holders have to stop foreclosure activities - for now. If an auction has been scheduled, they must postpone the sale for three to four months, unless the lender brings a successful motion to lift the stay. Still, even if the motion is granted by the court, it is likely that the sale will be held off.
However, once the lender notifies you of foreclosure proceedings and their notice period has passed, they can file a motion to lift the stay even if you are already in bankruptcy. In other words, they can go ahead with the auction and sale of your home.
Your Best Bankruptcy Option
Most individuals file either:
- Chapter 7 Bankruptcy: Under Chapter 7, the court appoints a trustee to review your financial situation and oversee the bankruptcy process. They sell non-exempt property and use the proceeds to repay your creditors. Your home is non-exempt, meaning it can be sold.
If you have equity in your residence that is more than what you owe your lender, the trustee will sell the home, pay the mortgage, and reimburse you the amount of the “homestead exemption” (in North Carolina, this is up to $35,000, up to $70,000 for married couples, and up to $60,000 for qualifying seniors). If there is money remaining, the trustee uses it to pay other unsecured debts, such as credit cards, personal loans, and medical bills.
Under Chapter 7, any remaining debts will be discharged.
- Chapter 13 Bankruptcy: Unlike Chapter 7, with Chapter 13, you create a repayment plan to pay all or part of your debts. You propose a plan to make installments over three to five years. If you want to keep your home, Chapter 13 is a better course. You can pay off the late payments over the term of your repayment plan as long as you are making your regular payments too. As long as you do this, you avoid foreclosure.
If you have multiple mortgages, second or third mortgages (i.e. junior mortgages) may no longer be fully secured by the value of your home. In this case, you can use “lien stripping.” Here, you ask the court to recategorize the junior mortgages as unsecured debt. In bankruptcy proceedings, unsecured debt is a low priority and may not be paid back in full or at all.
If you want to keep your home, look into Chapter 13. Bankruptcy is not intended to leave you destitute; rather, it is designed to give you the time and opportunity to regain your financial footing.
What About My Credit Score?
A bankruptcy stays on your credit report for seven years. However, some lenders are willing to grant loans because you do not have that pile of debt to contend with. Others are worried about their risk. So yes, bankruptcy does have long-term consequences, but it does help you get a fresh start after your debts are discharged.
Foreclosure also has a significant impact on your credit score - and you still have all of those other debts (e.g. credit cards, medical bills, utility bills, personal loans, etc.) on your plate. This can impact your ability to obtain credit and make it incredibly difficult to buy a house.
If you are facing foreclosure, contact Robert P. Laney to discuss your options and start moving forward.