A mortgage is a major financial commitment. Homeowners have to make their minimum payment every month on time. Failure to do so can result in late payment fees and blemishes on their credit reports. If homeowners fall far enough behind on their payments, they could be at risk of foreclosure. The lender can lay claim to the home, which serves as the collateral for the loan used to purchase the property.
People can lose years of accumulated equity after a few months of financial hardship. Some people feeling concerned about foreclosure choose to file for personal bankruptcy. How can bankruptcy protect those who have missed mortgage payments?
By ending collection efforts
Regardless of what type of bankruptcy an individual files, they can benefit from an automatic stay. The courts notify the credit bureaus of the pending bankruptcy case. Creditors typically need to cease all collection efforts until the courts resolve the bankruptcy case. Not only do they need to stop calling and sending letters, but they also have to dismiss any pending legal cases against the filer. Lawsuits and foreclosure proceedings typically end until the courts approve or dismiss the bankruptcy case. That extra time can provide the filer with an opportunity to catch up on their payments or negotiate an arrangement with their lender.
By promoting cooperation
In a Chapter 13 bankruptcy case, lenders often renegotiate the terms of debts with filers. The courts oversee a multi-year repayment plan that addresses many of the filer’s obligations. Even mortgages and secured debts, which are not always eligible for discharge, require review and adjustment when establishing a repayment plan in some cases. Lenders may agree to increase the repayment period, reduce monthly payments or lock in an interest rate as part of a mortgage modification during bankruptcy.
By correcting budget issues
In a Chapter 7 bankruptcy, filers may not have the same leverage they enjoy in Chapter 13 cases regarding the renegotiation of mortgage terms. However, they may be able to discharge credit card debts and other financial obligations within a matter of months. At that point, they can potentially rework their household budget after eliminating some of their financial obligations. It may be much easier for them to make mortgage payments in the future and limit the risk of foreclosure.
Filers considering a Chapter 7 bankruptcy or preparing for a Chapter 13 bankruptcy often need help making the most of the process. Securing proper guidance and advocacy early in a bankruptcy case can help people prevent foreclosure and other catastrophic financial issues.