Filing a Chapter 7 only temporarily avoids foreclosure. But filing a Chapter 13 can permanently stop the foreclosure process and allow you to keep the home. It is essential to file a Chapter 7 or Chapter 13 before the sale. Why?
- After the auction, you have no rights in the property. It no longer belongs to you and even a bankruptcy will not normally bring it back.
- After the auction, you owe the tax debt and the deficiency. Any home sold after 12-30-2012 requires the lender to file a 1099 for any deficiency creating a tax debt. Filing a bankruptcy before the sale eliminates having a tax debt.
- In Kentucky, at the moment the auction occurs a judgment is entered for the deficiency. Fannie Mae announced in 10-2010 that they would sue and collect any deficiency. Bankruptcy eliminates garnishment of wages and bank accounts for any deficiency.
You only have 20 days after you are served to file an answer or file bankruptcy. Otherwise, the court may issue a default judgment and sale. A Bankruptcy avoids losing possession of the home. Filing a Chapter 13 immediately after a Chapter 7 to save the home is possible. Eliminating the unsecured debt first in Chapter 7 first eliminates having to pay unsecured debt later in Chapter 13. Chapter 13 can be filed after a Chapter 7 to save the home with no unsecured debt that has to be repaid.
Avoid Foreclosure with Chapter 7
A Chapter 7 Bankruptcy will only temporarily stop a home foreclosure sale. It protects the debtor from any deficiency or tax debt if it is filed before the sale. There is no debt to “forgive” and no income from a “debt being written off” because the Debtor has no legal liability or personal obligation or responsibility for the debt after bankruptcy. A Bankruptcy filed after the sale is often too late to reverse the tax. In defending the foreclosure each step in the process of filing an answer, discovery and finally filing the bankruptcy will normally delay the foreclosure for an additional six months. In some cases, it has delayed the process for years. Sometimes just filing a Chapter 7 and eliminating unsecured debt can make you able to afford your home and avoid foreclosure.
Avoid Foreclosure with Chapter 13
Catching up payments in Chapter 13 will often permanently stop a foreclosure. You can take up to 5 years to cure your arrearage, but the payments must be made on time. If your second mortgage is essentially unsecured, you can file a Chapter 13 and treat the mortgage as an unsecured debt and eliminate it in Chapter 13! There are mortgage programs which let you refinance to a lower interest rate. In 2017 this was below 5%. You can apply one year after your file a Chapter 13. Plus you can pursue a mortgage modification, ask for an accounting of mortgage charges and file motions to contest improper claims in Chapter 13.
A Chapter 13 Bankruptcy can certainly stop most foreclosures. But you have to make the payments on time in Chapter 13 and keep records to stop a foreclosure. If you file a Chapter 13 Bankruptcy to stop a home mortgage foreclosure keep a record of the payment history and proof that you are current with your post-petition mortgage loan payments. Bankruptcy courts in Louisville Kentucky and Indiana require debtors to pay their ongoing mortgage payments directly to the mortgage lenders starting the day they file their Chapter 13. Debtors can only catch up and pay any arrearage to stop a foreclosure through their Chapter 13 plans.
Motions for relief from stay
Mortgage companies who are not paid on time will file motions for relief from the stay if they are not being paid on time. A motion for relief from stay requests permission to start the foreclosure again in state court. Mortgage companies can also file motions for relief from stay if they are not provided proof of tax and insurance payments. If you keep records of the mortgage, property tax and insurance payments you will have have proof. If you cannot produce copies of canceled checks or receipts for payments the home will simply go back into foreclosure.
The bank may offer a probationary order which allows you the ability to catch back up over six months. However, the bank has to pay a 300 dollar filing fee to file the motion for relief from stay. You will often have about 750 in additional attorney fees from such a motion. This will be part of what the debtor has to catch up.
I tell my clients to create a Chapter 13 file for records that include copies of payments, escrow payments, insurance payments, appraisals, pay stubs and tax returns. You may not need these documents but if you do it will save the day. You have to take an active role in your Chapter 13 case. Be sure to educate yourself about the process.