According to a recent year end report from RealtyTrac, there were approximately 2.8 million foreclosure filings in 2009, with filings in 2010 projected to hit the three million mark. Despite the implementation of federal loan modification and refinancing programs, many homeowners are continuing to struggle with their unmanageable mortgage debt. For those homeowners who do not qualify for federal aid or for whom a short sale is not an option, there is one potential way to avoid foreclosure in the form of Chapter 13 bankruptcy.
How Chapter 13 Bankruptcy Works
Under Chapter 13 bankruptcy, debtors commit to repaying their outstanding debts under a court-approved repayment plan over a period of three to five years. To qualify for a Chapter 13 filing, petitioners must provide the court with a list of their assets and liabilities, proof of income, and a proposed plan for debt repayment, which must be approved by the individual's creditors and the court. Chapter 13 bankruptcy is often a preferable option for those individuals who are struggling to manage their debts but whose income or assets disqualify them from filing for Chapter 7 bankruptcy.
Chapter 13 Bankruptcy and Mortgage Debt
For homeowners who are potentially facing foreclosure, Chapter 13 bankruptcy is beneficial in several ways. First, upon filing the bankruptcy petition, an automatic stay is granted that prevents creditors from pursuing collection actions against the debtor, including foreclosure proceedings. The exception to this rule is if a homeowner has already been served with a foreclosure notice. If notice has been served, the lender may ask the court to vacate the stay and allow the sale to proceed.
A second benefit to homeowners filing Chapter 13 is that it allows them to bring their mortgage payments current and repay any overdue payments or fees over a three- to five-year period. Individuals must be able to demonstrate their ability to repay both the current mortgage and the arrearage within the prescribed time frame.
There is an additional benefit to homeowners who are carrying second or third liens against their home. If they can demonstrate to the court that the total value of the home is secured by the first mortgage only, meaning they lack the equity to obtain additional liens, then the court may recategorize those loans as unsecured debt, assigning them a lower repayment priority status.
Things to Consider Before Filing for Bankruptcy
While there are potentially several benefits to homeowners who would rather go bankrupt than lose their homes to foreclosure, there are also a number of negative consequences to bankruptcy. Lenders must agree to the terms of the bankruptcy and there is no guarantee that they will not petition the court to allow a foreclosure to proceed. If a Chapter 13 bankruptcy is granted and the homeowner fails to make regular payments, the lender may immediately resume foreclosure proceedings.
There is also the damage to one's credit, as a Chapter 13 filing can remain on a credit report for up to seven years. A low credit score can make it difficult to obtain new credit and many employers now take into consideration credit histories when hiring for certain positions. If an individual is able to secure new credit, it may often be at above-average interest rates, which can be very costly.
For homeowners who are in danger of losing their home, Chapter 13 bankruptcy may be a viable alternative, providing certain conditions are met. Before making the decision to file, one must consider the advantages and possible negative outcome of doing so.
Rebecca Lake - R.L. Lake is a freelance writer and virtual assistant living in the southeast. In addition to writing for Suite101, she writes content for ...
