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Foreclosure Resource Center

Chapter 7 and Mortgage Foreclosure

Chapter 7 bankruptcy is a liquidation bankruptcy. A Chapter 7 will typically eliminate:

  • credit card debt;
  • installment loans;
  • pay day loans;
  • medical bills, and most other unsecured debt.

In most cases consumers will keep all of their property. If you are facing foreclosure on your home, the automatic stay created by your Chapter 7 filing serves as a temporary defense against foreclosure. As opposed to Chapter 13 bankruptcy, Chapter 7 will give you a fresh start, but will not provide you with the opportunity to catch up with your mortgage payments.

However, Chapter 7 bankruptcy will allow you to discharge, or eliminate, any deficiency balance owed to your mortgage company if your home is sold for less than the outstanding balance owed to the mortgage company.

The Difference Between Chapter 13 and Chapter 7 Bankruptcy?

The biggest difference is that a Chapter 7 bankruptcy does not provide for the repayment of any debt. Chapter 7 cannot stop a mortgage company from foreclosing on property. Chapter 7 will temporarily delay the foreclosure proceeding, but it cannot provide the long-term protection of Chapter 13 because no plan to repay the mortgage delinquency is proposed.

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Chapter 13 Bankruptcy & Mortgage Foreclosure

Mortgage companies continue to foreclose on American homes at an alarming rate. The real estate market boomed in the late 1990’s and early 2000’s. Property values soared and homeowners cashed in on their new found home equity. However, interest rates have climbed, the real estate market has cooled and homeowners realize it’s a buyer’s market. Some homes will sit on the market for six, nine or twelve months. The asking price goes down and homeowners inch closer to the edge of foreclosure.

Many consumers do not understand that the bankruptcy code can help them save their homes from mortgage foreclosure. Chapter 13 bankruptcy is a very powerful tool that can save your home if you have fallen behind on your mortgage payments and you want to rescue your home from mortgage foreclosure.

What is a Mortgage Foreclosure:

Foreclosure is the legal proceeding in which a bank or mortgage company takes title to real estate due to the homeowner’s failure to make the agreed mortgage payments.

The downward spiral into foreclosure begins when your loan payment becomes 16 days overdue. At that point, your mortgage lender may try to contact you to work out a repayment schedule to bring your loan current. If your payments fall 90 days behind, the mortgage company will likely refer your mortgage to an attorney that will start formal foreclosure proceedings.

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Chapter 13 Bankruptcy Stops Foreclosure:

Chapter 13 bankruptcy is designed to stop foreclosure. In fact, stopping mortgage foreclosures is the driving force behind many Chapter 13 bankruptcies. As soon as you file Chapter 13 bankruptcy an “automatic stay” goes into effect. This “stay” stops your mortgage company from continuing to foreclose on your home. Your mortgage company cannot contact you in regard to your pre-filing mortgage arrears (the amount you are behind on the mortgage) while you are in the Chapter 13 bankruptcy.

How Does Chapter 13 Bankruptcy Work:

Once you prepare a Chapter 13 plan with your attorney, you will file a Chapter 13 petition for relief and the foreclosure proceeding will stop. The bankruptcy trustee will then recommend your Chapter 13 plan for confirmation and the bankruptcy court will approve a repayment plan that allows you to get current on your mortgage over a three to five year period. You must make all current mortgage payments that come due after the Chapter 13 bankruptcy petition is filed.

Homeowners must make all mortgage payments that come due during the Chapter 13 plan. If you fail to make your post-filing mortgage payments the mortgage company can ask the bankruptcy court to lift the protection of the automatic stay and the mortgage company can resume the foreclosure proceeding if the judge agrees with the mortgage company. The possibility of refinancing your mortgage after you have gotten back on track with your Chapter 13 plan is a real possibility for many consumers

When Should You File Chapter 13 Bankruptcy to Stop a Mortgage Foreclosure:

Generally, the Chapter 13 bankruptcy must be filed before the mortgage company sells your home. However, if you find yourself behind on your mortgage payments you ought to call an experienced attorney to explore all of your options before the situation spins out of control. The Chapter 13 bankruptcy filing gives homeowners the time they need to catch up on their mortgage payments.

Who Can File Chapter 13 Bankruptcy:

You can file a chapter 13 bankruptcy to stop a mortgage foreclosure, provided you:

  • Are employed or have a steady source of income;
  • Have enough income to make your Chapter 13 plan payments, and your current mortgage payments after the chapter 13 is filed.

Chapter 13 plan payments are fixed so that you can meet all your living expenses first and then pay any surplus income to creditors. Mike and Chad can help you structure a repayment plan that works for you and your creditors.

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Foreclosure Terms

Acceleration Clause

A provision that allows the lender to call the entire balance of the mortgage loan when the borrower fails to make some installment payments.

Affidavit

A written statement usually given while under oath or in the presence of a notary.

Appraisal

The process by which a licensed person gives an estimate of property value.

Annual Percentage Rate (APR)

The annual interest rate covering the interest and other costs. The Truth in Lending Act requires lenders to announce the APR.

Assignment

The transfer of property to be held in trust or to be used for the benefit of the creditors (lenders).

Balloon Payment

Large installment payment required at the end of the term of the mortgage note to pay off the entire mortgage balance.

Bid

The amount for a foreclosed property for sale at auction.

Clear Title

A title that is not burdened with encumbrances or defects.

Deed

A signed document that shows ownership in property and allows the transfer ownership of property from one party to another.

Deed In Lieu of Foreclosure

A transfer of title by the borrower to the mortgage company upon foreclosure.

Deed of Trust

An instrument signed by a borrower, lender and trustee that conveys the legal title to real property as security for the repayment of a loan. The written instrument in place of mortgage in some states.

Default

A mortgage is in default when the borrower fails to make the payments as agreed to in the original promissory note.

Deficiency Balance

A judgment against the borrower for the balance remaining after the property is sold at auction or foreclosure sale.

Encumbrance

Mortgage, lien, tax, or any restriction on the use of land.

Equity

The value of real estate less the outstanding mortgages and debts pledged against the property.

Fair Market Value

The price that property would sell for on the market.

Fee Simple

Common term used to indicate complete legal ownership of a property.

FHA

Federal Housing Administration under U.S. Department of Housing and Urban Development (HUD).

Foreclosure

Legal action taken by the lender when the borrower fails to pay monthly installments.

Grace Period

Period between the due and the overdue date during which no late payment penalty applies to the mortgage payment.

Hazard Insurance

Insurance against the destruction of the property.

Judicial Foreclosure

A foreclosure that is processed by a court action.

Legal Description

A formal description of real property so that one can locate it by reference to government surveys or approved recorded maps.

Lien

A claim, or mortgage, on real estate for payment of debt.

Lis Pendens

Pending lawsuit.

Mortgage

A written pledge that uses real estate to secure repayment of a loan.

Notice of Sale

A notice giving specific information about the loan in default and the proceedings about to take place. This notice must be recorded with the county where property is located and advertised as stated in the security document or as dictated by state law.

Order Confirming Sheriff Sale

An order signed by the judge confirming the sale of foreclosed property.

Posting

To publish, announce or advertise by physically attaching a notice to an object.

Refinance

Paying off one mortgage loan by obtaining a new mortgage loan.

Right of Redemption

A borrower’s right to reacquire property lost due to a foreclosure. This right allows the owner to recover property lost to a foreclosure judgment, or sold after a foreclosure sale, within a certain period of time. The redemption period varies among the states.

Request for Notice

A recorded document requiring a trustee to send a copy of a Notice of Default or Notice of Sale concerning a specific deed of trust in foreclosure to the person who filed the document.

Title

A deed showing ownership to real estate.

Trustee Sale or Sheriff Sale

An auction of real property conducted by a trustee. Also referred to as a Sheriff’s Sale.

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