The Truth About Bankruptcy, Foreclosure, Avoiding Foreclosure, Chapter 7, Chapter 13

There’s not enough money at the end of all the bills you have to pay. You need one more paycheck to make ends meet. Costs of living keep going up and your monthly paycheck isn’t keeping up with the price of gas, the cost of food and everything else you value in your life. You can’t save anything because all your money goes to paying bills and supporting yourself and/or your family. And then . . .

One day you receive a piece of paper in the mail called a “Notice of Default” or a process server hands you a “Lis Pendens.” Either way, both are bad news because they mean your lender has initiated foreclosure proceedings against you (in either a non-judicial or a judicial foreclosure state respectively) because you owe back payments — typically three months worth. . . or more.

And then you start thinking, “Maybe I could cheat fate by filing for bankruptcy. That will wipe out all my debts. I can stop the foreclosure, keep the house, and the lender can’t do anything about it.” Well, think again!

If you file for personal bankruptcy under Chapter 7 a so-called “automatic stay” is placed on all your creditors, including the foreclosing lender, by the court. HOWEVER, the stay is only a temporary fix to the situation.

Chapter 7 never permanently stops home foreclosure. It only gives you relief from unsecured creditors like credit cards and prevents certain creditors from pursuing collection action against you. It does NOT discharge debts such as taxes, child support, alimony or student loans, nor can it give you relief from other secured creditors — like your lender — whose debt is secured by the home you’re living in.

In fact the “automatic stay” is only effective so long as the court wants it to be in place. At any time the court can grant your lender’s motion for “relief from the automatic stay.” Once the court grants that motion the foreclosure against your home can proceed to conclusion.

One viable exception does exist, however, by filing for a Chapter 13 bankruptcy. Under Chapter 13 you are allowed to sit down with your creditors and arrange a payment plan to pay back what you owe them over a given length of time and usually on a lower payment schedule. Once accepted, the creditors, like your lender, must abide by the terms of the plan.

Call it financial reorganization or a workout plan, any way you look at it Chapter 13 is a good way to save your home from foreclosure, and can indeed stop foreclosure so long as you continue to make the payments agreed to under the plan until all debt owed is totally paid off.

In essence, then, through a Chapter 13 debt reorganization plan you can cure the default and save your home. However, you must realize up front that not everyone qualifies to file for bankruptcy. There are certain threshold qualifications that must be met which were tightened up when the U.S. Bankruptcy Code was revised a few years ago.

Additionally, there are court costs to be paid, AND, of course, the homeowner must hire an attorney who is going to want to get paid too!