Wednesday, July 21, 2010
Filing Bankruptcy Can Help you Keep Your House
If you have fallen behind on your mortgage payments and are in danger of going into foreclosure, you may want to consider filing bankruptcy. It may help you save your home.
Filing bankruptcy can halt foreclosure proceedings, prevent harassment by debt collectors, and give you an opportunity to catch up on missed payments while you reorganize your finances. However, it is not a solution for all homeowners in danger of foreclosure. If your primary problem is a lack of income, bankruptcy will not provide you with a way to correct that issue.
Bankruptcy is a good option for individuals who have fallen behind on payments but who have steady income and can therefore eventually begin making payments again after their finances are reorganized. However, if it is unlikely that you will have the means to resume your payments after moving through bankruptcy, then this strategy most likely will not help you keep your home in the long run.
The first step in the process is figuring out which type of bankruptcy to file for. You essentially have two options – Chapter 7 bankruptcy and Chapter 13 bankruptcy. Your specific financial situation will determine which is the best option for you.
While filing Chapter 7 bankruptcy initially halts foreclosure proceedings, it often eventually results in the liquidation of most of your assets. Therefore, it is likely that you will still lose your home down the road. However, Chapter 7 eliminates all of your unsecured debt so that you will only have to repay your secured debt, such as your mortgage. Since all of your other debts have been discharged, you may be able to afford resuming your mortgage payments if you have a steady income.
Most experts generally recommend filing Chapter 13 if you want to keep your home. By filing Chapter 13 bankruptcy, you will generally have three to five years to reorganize your finances. During this time period, the court agrees to an income-based budget and monthly payments that will be made to trustees, who will then pay off your debt. Your secured debt, such as a mortgage, will be paid off first. Any remaining money will be used to pay off unsecured debt, starting with back income taxes. Finally, expenses such as credit card debt and medical bills will be paid, generally at a vastly reduced rate (sometimes as little as five cents on the dollar).
If you are diligent at keeping up with your payments to the trustees, you can often emerge from bankruptcy in possession of your home.
Bankruptcy can offer you one additional piece of relief from a mortgage that is beyond your financial capacity to pay. While the courts cannot reduce mortgage debt to reflect a depreciated value of your home, they have the ability to relieve second mortgages, such as home equity loans, if the value of your home has fallen below the first mortgage balance. In this situation, the second mortgage would be considered unsecured debt, and it would be paid off at the same rate used with your other unsecured debt.
Of course, there are other downsides to filing bankruptcy. Your credit rating will generally plummet, and bankruptcy can remain on your credit report for as much as ten years. Therefore, it is important to weigh these issues with the advantage of keeping your home before determining whether bankruptcy is the right strategy for you.