Filing a Chapter 7 only temporarily avoids foreclosure with bankruptcy. 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?
- 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.
- Fannie Mae announced in 10-2010 that they will sue and collecting for deficiencies. Bankruptcy eliminates this.
- If a home sells after 12-30-2012 lenders will file a 1099 for any deficiency creating a tax debt. Filing a bankruptcy before the sale eliminates having a tax debt.
Filing a Chapter 7 and Chapter 13 immediately after the Chapter 7 to save the home is possible. Eliminating the unsecured debt first in Chapter 7 eliminates any unsecured debt. The Chapter 13 that can be filed after that has no unsecured debt that has to be repaid.
A Chapter 7 Bankruptcy will only temporarily stop a home foreclosure sale but it still protects the debtor from any deficiency or tax debt if it is filed prior to the sale. There is no debt to “forgive” and no income from “debt forgiveness” 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 about an additional 6 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 a 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 a Chapter 13! There are programs that let you refinance to a lower interest rate which in 2012 was below 5% 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 a Chapter 13.
A Chapter 13 Bankruptcy can certainly stop most foreclosures but you have to make the payments on time in a 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.
If you keep records of the mortgage payments you will have have proof if the mortgage company files what is called a motion for relief from stay. Mortgage companies that are not paid on time will file motions for relief from the stay if they are not being paid on time requesting permission to start the foreclosure again in state court. Mortgage companies can also file motions for relief from stay if they are not keep proof of tax and insurance payments if your property taxes and insurance is not being escrowed and paid by the mortgage company.
Banks will often file a motion for relief from stay and Debtors will often have to prove their payment history. If you cannot produce copies of canceled checks, or receipts for payments the home will simply go back into foreclosure.
At any hearing for the motion for relief from stay the lender may present a payment history that shows receipts, payment reversals and disbursements from escrow. If the debtor cannot produce proof of payments, there the judge will simply accept the bank’s testimony and the home will go back into state court for a foreclosure. Too many Debtors have been forced to pay double post petition loan payments simply because they didn’t keep records.
I tell my clients to create a Chapter 13 file for records that includes copies of payments, escrow payments, insurance payments, appraisals, informal valuations, 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 because your attorney won’t be keeping your receipts and tax records. Be sure to educate yourself about the process.