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Bankruptcy can Halt Foreclosure

By Erik Hammel on November 7, 2011

law-books-(1).jpgDeclaring bankruptcy can be an effective means to halt a foreclosure, but it may not be for everyone. Before discussing the meat of the subject, let’s first define what these financial terms are.

Bankruptcy is a legal status that signifies that a person or organization cannot repay debts owed to his lenders and creditors. There are several legal forms of bankruptcy, but the most common type individuals face is known as Chapter 13 bankruptcy, which enables individuals with regular income to develop a plan to repay all or part of their debts. Foreclosure is the process of taking possession of a mortgaged property as a result of a debtor’s failure to keep up mortgage payments. For example, if an individual is unable to pay their monthly mortgage and that person put a mortgage on their home, the bank can legally repossess his or her home. Now let’s analyze what effect declaring bankruptcy can have on foreclosures.

Many homeowners will do whatever possible to avoid having their houses foreclosed in the indefinite future. If you fit this description, and you are falling behind on your paying your mortgage with no feasible way to get current, the only way to keep your home is to file a Chapter 13 bankruptcy.

Here’s what Chapter 13 bankruptcy does. This form of bankruptcy lets you pay off the arrearage (late, unpaid payments) in usually monthly increments over the course of a repayment plan you choose and propose – up to five years in some cases. However, you will need to have enough income to meet your current mortgage fee while you are paying off the arrearage. Assuming you make all the required payments up to the end of the repayment plan, you'll avoid foreclosure and keep your home.

Note, however, that if you fail to pay the Chapter 13 bankruptcy fees when they are due, foreclosure will occur. Therefore, declaring Chapter 13 bankruptcy does not stop foreclosure. It effectively halts the foreclosure process until the debtor repays its mortgage and arrearage through the Chapter 13 bankruptcy. Lenders can't foreclose or even try to collect debt until permitted to do so by the court.
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