Avoiding Foreclosure on Your Home by Declaring Bankruptcy

While bankruptcy might seem like a last-ditch effort to many, for those potentially facing foreclosure, it can, in fact, save your home in some circumstances. Once a bankruptcy petition is filed, lenders must cease debt collection activities and foreclose on your home unless the mortgage company obtains special permission – what is known as a “Relief from Automatic Stay.” But what type of bankruptcy makes the most sense in this circumstance? Chapter 7 or Chapter 13 bankruptcy, as we discuss below:

Chapter 7

Declaring Chapter 7 bankruptcy will slow down the foreclosure process but may require you to liquidate other assets that cannot be protected by exemptions/up to a certain value. This option tends to be pursued by those who need to wipe away a number of unsecured debts, such as credit card balances and/or medical bills, and by doing so, potentially allow the homeowner to catch up on mortgage payments.

Chapter 13

More homeowners rely on declaring Chapter 13 bankruptcy in order to hold onto their homes, especially if they have substantial equity in the home. This option can essentially buy time for the homeowner (typically three to five years) to set up a monthly payment schedule (as established based on assets, income, and outstanding debt). These payments are then made to the bankruptcy trustee, who then pays the creditors.

Priority of Payments

In general, payments to creditors follow the following priority list: Mortgage, car payments, and then any unsecured priority debt, such as overdue income taxes, alimony, child support, etc. While arrearages on secured debt and priority unsecured debt must be paid in full by relying on the payment plan, unsecured debts (such as credit card debt, medical bills, etc.) need to be paid back to some extent, and some may be discharged upon completion of your Chapter 13 plan; all depending upon income level.

By sticking to the schedule outlined in the Chapter 13 repayment plan, a borrower can retain ownership of their home. However, note that bankruptcy proceedings do not allow for the principal owed on the mortgage to be adjusted, nor can the bankruptcy court adjust the interest rates or terms of the loan.

What About a Second Mortgage?

In this case, Chapter 13 can provide an additional advantage to borrowers by eliminating the second mortgage under some circumstances, such as, for example, if the home’s value falls before the balance of the first mortgage. This is because there is essentially no available equity to attach the lien to, rendering the second mortgage to the status of an unsecured debt subject to discharge.

The Best in Florida Bankruptcy Assistance in Jacksonville, Florida

If you have concerns about losing your home to foreclosure here in Florida, your bankruptcy attorney can assist you. Our Jacksonville, Florida bankruptcy attorneys provide bankruptcy assistance for consumers in Jacksonville and surrounding areas of Florida. Contact us today to request a free consultation and find out how we can help ensure that you and your home are protected.