By avoiding foreclosure with bankruptcy, you have the force of a federal judge and the bankruptcy court behind you. Filing Chapter 7 only temporarily avoids foreclosure for about six months. However, Chapter 13 permanently stops the foreclosure process, cures the default, and allows you to keep the home. Furthermore, it is essential to file a Chapter 7 or Chapter 13 before the sale. Why?
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After the auction, you have no rights in the property. It no longer belongs to you. Even bankruptcy will not bring it back. You can redeem the property if you have thousands in the bank to pay the purchaser what he paid plus a small profit. But I have never met a single homeowner who had the money to do that.
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After the auction, you owe any deficiency and an income tax debt. Any home sold after 12-30-2012 requires the lender to file a 1099-C for any deficiency creating a tax debt. Filing bankruptcy before the sale eliminates having this tax debt.
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In Kentucky, at the moment the auction occurs, the lender obtains a judgment for the deficiency. Fannie Mae announced in 10-2010 that they would sue and attempt to collect any deficiency. Bankruptcy eliminates garnishment of wages and bank accounts for any deficiency.
You only have 20 days after you are served to file an answer or file bankruptcy. Otherwise, the court will typically issue a default judgment and sale. A Bankruptcy avoids losing possession of the home. But it must be filed before the commissioner’s sale.
Options to Avoid Foreclosure with Bankruptcy
Why file a Chapter 7 and then a Chapter 13 to stop a foreclosure sale?
Chapter 7 eliminates the liability for most, if not all, of your unsecured debt. However, filing Chapter 13 after Chapter 7 means you don’t have to repay any of the unsecured debt you discharged in Chapter 7, allowing you to focus on your mortgage debt. This brings your Chapter 13 payments as low as they can be. In fact, filing Chapter 7 and then a 13 often makes saving the home affordable and possible.
Next, eliminating the unsecured debt in Chapter 7 first then eliminates paying unsecured debt later in Chapter 13. Finally, Chapter 13 is often filed after Chapter 7 to save the home with no unsecured debt to repay.
Avoiding foreclosure with Chapter 7 due to missed mortgage payments.
Chapter 7 Bankruptcy only temporarily stops a home foreclosure sale. When a mortgage lender forecloses, Chapter 7 Bankruptcy can temporarily halt the foreclosure sale. However, it protects the homeowner from any deficiency or tax debt if it is filed before the sale. In fact, there is no debt to “forgive” and no income from a “debt being written off.” Then, the homeowner has no legal liability, personal obligation, or responsibility for the debt after bankruptcy.
A Bankruptcy filed after the sale is often too late to reverse the tax. In defending the foreclosure, filing an answer, discovery, and submitting the bankruptcy will generally delay the foreclosure for an additional six months. In some cases, it delays the process for years. Therefore, sometimes just filing a Chapter 7 and eliminating unsecured debt makes your home affordable and avoids foreclosure.
⎆ Avoiding foreclosure with Chapter 13.
Catching up payments in Chapter 13 often permanently stops a foreclosure. You can take up to 5 years to cure your arrearage, but the payments must be on time. If your second or third mortgage is entirely unsecured, you can file a Chapter 13 and treat the mortgage as an unsecured debt and eliminate it in Chapter 13!
There are also mortgage programs that let you refinance to a lower interest rate. For instance, in 2017 this was below 5%. Interestingly, you can apply one year after your file Chapter 13. Plus, you can pursue a mortgage modification, ask for an accounting of mortgage charges, and file motions to contest improper claims in Chapter 13.
A Chapter 13 Bankruptcy certainly stops most foreclosures. But you have to make the payments on time in Chapter 13 and keep records to stop a foreclosure. For instance, if you file Chapter 13 to prevent a home mortgage foreclosure, keep a record of the payment history and proof that you are current with your post-petition mortgage loan payments.
Bankruptcy courts in Louisville, Kentucky, and Indiana require debtors to pay their ongoing mortgage payments directly to the mortgage lenders starting the day they file their Chapter 13. Debtors can only catch up and pay any arrearage to stop the foreclosure process through their Chapter 13 plans.
⎆ Proposing a Repayment Plan
Proposing a repayment plan is a crucial step in the Chapter 13 bankruptcy process. When filing for Chapter 13 bankruptcy, you will need to propose a repayment plan that outlines how you intend to pay off your debts over a period of three to five years. This plan must be approved by the bankruptcy trustee, your creditors, and the bankruptcy judge.
To propose a repayment plan, you will need to gather financial information, including your income, expenses, and debt obligations. You will also need to determine which debts you want to prioritize, such as your mortgage payments, and which debts you can afford to pay off over time.
Your repayment plan should include the following information:
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A list of all your debts, including secured debts like your mortgage and unsecured debts like credit card balances.
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A plan for how you will pay off each debt, including the amount you will pay each month and the total amount you will pay over the life of the plan.
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A plan for how you will make your monthly mortgage payments and catch up on any missed payments.
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A plan for how you will pay off any second or third mortgages, if applicable.
Once you have proposed your repayment plan, it will be reviewed by the bankruptcy trustee, your creditors, and the bankruptcy judge. If your plan is approved, you will begin making payments according to the plan, and you will be protected from foreclosure proceedings by the automatic stay.
Bankruptcy and Foreclosure
Bankruptcy and foreclosure are two separate processes that can have a significant impact on your financial situation. Bankruptcy is a legal process that allows you to reorganize or eliminate your debts, while foreclosure is the process by which a mortgage lender takes possession of your home when you fail to make mortgage payments.
Filing for bankruptcy can help stop foreclosure proceedings, at least temporarily. When you file for bankruptcy, an automatic stay goes into effect, which prohibits creditors from taking any collection actions, including foreclosure. This can give you time to catch up on missed mortgage payments or negotiate a loan modification with your lender.
However, bankruptcy is not a guarantee that you will be able to keep your home. If you are behind on your mortgage payments and file for Chapter 7 bankruptcy, you may still lose your home to foreclosure. Chapter 13 bankruptcy, on the other hand, allows you to propose a repayment plan that includes catching up on missed mortgage payments and making current mortgage payments.
⎆ How Bankruptcy Can Help
Bankruptcy can help with foreclosure in several ways:
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Stopping foreclosure proceedings: The automatic stay that goes into effect when you file for bankruptcy can stop foreclosure proceedings, at least temporarily.
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Catching up on missed mortgage payments: Chapter 13 bankruptcy allows you to propose a repayment plan that includes catching up on missed mortgage payments.
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Eliminating unsecured debt: Bankruptcy can help eliminate unsecured debt, such as credit card balances, which can free up more money in your budget to make mortgage payments.
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Negotiating a loan modification: Bankruptcy can give you leverage to negotiate a loan modification with your lender, which can make your mortgage payments more affordable.
⎆ Motions for relief from stay.
Mortgage companies who are not paid on time file motions for relief from the stay. A motion for relief from stay requests permission to start the foreclosure again in state court. Mortgage companies also file motions for relief from stay if they are not provided proof of tax and insurance payments. However, if you keep records of the mortgage, property tax, and insurance payments, you have evidence. If you cannot produce copies of canceled checks or receipts for payments, the home will simply go back into foreclosure.
The bank may offer a probationary order, which allows you the ability to catch back up over six months. However, the bank has to pay a $300 dollar filing fee to file the motion for relief from stay. There is also about $750 to $1000 in additional attorney fees from such a motion. So, these attorney fees will be part of what the homeowner has to catch up.
I tell my clients to create a Chapter 13 file for records. This should include copies of payments, escrow payments, insurance payments, appraisals, pay stubs, and tax returns. You may not need these documents, but if you do, it saves the day. You have to take an active role in your Chapter 13 case. Be sure to educate yourself about the process. By avoiding foreclosure with bankruptcy you have the force of a federal court order behind you.
⎆ Eliminating Deficiency Balances
A deficiency balance is the amount of money that you still owe on your mortgage after your home is sold at a foreclosure sale. In some states, lenders can sue you for this amount, which can be a significant financial burden.
Filing for bankruptcy can help eliminate deficiency balances. In Chapter 7 bankruptcy, deficiency balances are considered unsecured debt and can be discharged, meaning you will no longer be responsible for paying them. In Chapter 13 bankruptcy, deficiency balances can be included in your repayment plan and paid off over time.
⎆ Filing for Bankruptcy After Foreclosure
If you have already lost your home to foreclosure, you may still be able to file for bankruptcy to eliminate any remaining debt, including deficiency balances. Filing for bankruptcy after foreclosure can help you:
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Eliminate deficiency balances: As mentioned earlier, deficiency balances can be discharged in Chapter 7 bankruptcy or paid off over time in Chapter 13 bankruptcy.
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Eliminate other debt: Bankruptcy can help eliminate other debt, such as credit card balances, which can help you get back on your feet financially.
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Rebuild your credit: Filing for bankruptcy can give you a fresh start and allow you to begin rebuilding your credit.
It’s important to note that filing for bankruptcy after foreclosure can be complex and may require the help of a bankruptcy attorney.
Resources for Bankruptcy
Louisville Kentucky Bankruptcy Forms
How to Аvoid Louisville Kentucky Foreclosures • Video
Mortgage Foreclosures in Louisville Kentucky
Student Loan Income-Based Repayment (IBR)
Chapter 7 Bankruptcy in Louisville Kentucky
If you are thinking about facing foreclosure, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.
