In times of extreme financial difficulty, many people fall behind on their mortgage payments. In some instances, the mortgage company or lender will work with the homeowner by modifying the terms of the loan or facilitating a short sale, but other times they will start the foreclosure process, which entitles them to repossess the house and sell it at auction to pay off the delinquent mortgage.
If you file Chapter 7 or Chapter 13 bankruptcy, an Order for Relief is automatically issued by the court. This order directs all of your creditors to stop their collection efforts, so if your home was scheduled for a foreclosure sale, it will be postponed until the bankruptcy is finalized. The lender may file a motion to lift the stay and proceed with the sale, but in most instances, filing for bankruptcy will hold off the auction for at least a couple of months.
Chapter 13 and foreclosure
You will typically be permitted to file Chapter 13 bankruptcy in New York if you have a steady source of income and owe no more than $383,175 in unsecured debt and $1,149,525 in secured debt. Chapter 13 is a preferred option for those who want to keep a secured asset, such as their home, when more equity exists in that asset than the New York bankruptcy exemptions will protect.
Once you file, you have the opportunity to prevent foreclosure of your home by setting up a payment plan to repay any mortgage arrears. As long as you make all of the required payments for the duration of the plan, you will keep your home. Chapter 13 even allows you to categorize second and third mortgages as unsecured debt, which is low priority and does not normally have to be repaid. This will only work, however, if the first mortgage is secured by your homeâ€™s entire value, meaning that there is no remaining equity to cover the additional mortgages.
Chapter 7 and foreclosure
Although Chapter 7 wipes out all debt secured by your home, such as mortgages and home equity loans, you could still potentially lose the property itself. When you take out a mortgage, you present your home as collateral in cause a default occurs. Unlike Chapter 13, which provides an opportunity to save your home by catching up on arrears, Chapter 7 forgives the debt but does not remove the lien itself.
There may still be hope: the automatic stay issued by the bankruptcy court cancels the foreclosure sale and prevents the lender from rescheduling it until after the bankruptcy. Most straightforward Chapter 7 bankruptcies take three to four months to complete, giving you extra time to try working out a foreclosure alternative with the creditor, such as a loan modification.
Even if you do end up losing your home to foreclosure, declaring Chapter 13 or Chapter 7 bankruptcy can help you regain your financial footing. This is the first step toward new, possibly better home and other advantages that financial independence brings. If you are behind on your mortgage or you are swamped with credit card bills, then bankruptcy might be right for you. To learn more about a fresh start, set up a free in-office consultation with Jayson Lutzky. He is a Bronx bankruptcy lawyer with over 33 years of legal experience. Call 718-329-9500 to set up an appointment and visit www.MyNewYorkCityLawyer.com to learn more about Mr. Lutzky today.