Bankruptcy
For homeowners who have found themselves struggling to keep up with their mortgage payments after an increase in their rate or after an unfortunate change in their personal finances, such as the result of a job loss, in general, trying to negotiate changes or attempting to modify a home loan is a better option to avoiding foreclosure rather than filing bankruptcy. Bankruptcy typically is a solution to an unmanageable financial burden when it consists of other debts in addition to your mortgage, like credit card and medical bills.
Now, if you are at the 11th hour though, and your home is set to be sold at a foreclosure sale, filing for bankruptcy can be a powerful delay tactic since it immediately puts a stop to the sale and gives you some additional time in the home while the bankruptcy court sorts out the details of your case.
Important Facts About Bankruptcy
- Counseling is required before you are allowed to file for bankruptcy.
- Bankruptcy cases are complicated matters which usually require you to engage an attorney.
- Bankruptcy does not mean you will lose all of your property.
- Creditors will at least be temporarily, and maybe even permanently, restricted from collecting on your debt.
- Bankruptcy can delay a foreclosure and erase many of your debts.
Chapter 7 & Chapter 13 Bankruptcy Compared
| Chapter 7 Bankruptcy | Chapter 13 Bankruptcy | |
|---|---|---|
| Do you qualify? | If you can pass a means test or if your income is below the state median | If your income is sufficient for a reasonable repayment plan |
| Effect on your foreclosure? | Delayed by 3 or 4 months | Delayed and possibly avoided |
| What happens to your property? | Everything, except what is legally exempt, is sold to repay your creditors | You keep your property |
| What happens to your mortgage? | Even though the amount you owe is discharged, you must make payments on the lien created by the mortgage to avoid foreclosure | Your 2nd and 3rd mortgages may be eliminated, but your 1st mortgage will likely remain intact |
| What happens to your debts? | Most of your debts are discharged, but some survive, like child support and back taxes | If you stick to a court approved repayment plan where you repay a portion of your debt over 3 to 5 years, the remaining debt is forgiven |
| How long does it take? | 3 to 4 months | 3 to 5 years |
| Will you need a lawyer? | Not likely | Yes, suggested |
| Filing fee | $299 | $274 |
How Much are the Attorney Fees?
The costs for using a lawyer to fight a foreclosure or for a bankruptcy case vary depending on the attorney and where you live.
- Costs to Fight a Foreclosure in Court: Whether you are using a bankruptcy or real estate attorney, if you are planning to fight a foreclosure in court expect to pay several thousand dollars up front to retain an attorney.
- Chapter 7 Bankruptcy Costs: Expect to pay between $1,200 and $2,000. Most likely the lawyer will require that you pay before filing since the bankruptcy cancels your debt, which includes any outstanding attorney fees.
- Chapter 13 Bankruptcy Costs: Expect to pay between $3,000 and $4,000. Usually a portion is requested up-front, about $1,500, with the remainder paid through your Chapter 13 repayment plan approved by the court.
How to Pay Less
When working with an attorney you can ask to pay for unbundled services, meaning that you’ll only pay for specific tasks instead of having the attorney be responsible for the whole case. If for example you file the bankruptcy yourself and are then faced with a lender who asks the court to allow it to continue on with the foreclosure process, you can then hire the attorney specifically to fight the lender’s request.
Another option to cut down on costs is with the use of a bankruptcy petition preparer (BPP). A BPP is not a lawyer, but they are professionals familiar with the bankruptcy process. They can assist with matters like helping you prepare your bankruptcy forms. They can not provide legal advice nor answer questions related to the consequences of bankruptcy. A BPP can be used in conjunction with an attorney who is providing unbundled services so that you can obtain advice from the attorney and then use the BPP for the leg work. In California, look for a legal document assistant (the official name for independent paralegals) who provide Bankruptcy Petition Preparer services.
When Bankruptcy is Not the Best Solution to Foreclosure
Bankruptcy as a solution to avoiding foreclosure is better suited to alleviate an unmanageable financial burden when in addition to your mortgage also consists of other debts like credit card and medical bills.
Bankruptcy judges are able to reduce and eliminate certain debts, but a first mortgage on a primary residence (a home that is occupied by the owner) is not one of them. A judge can not alter the total amount owed, the interest rate or any other term on these home loans. Alternatively though, a bankruptcy judge can reclassify second and third mortgages as unsecured debt which decreases their priority in being repaid, but unfortunately the weight of a “mortgage burden” is usually due to the first mortgage on a property.
Bankruptcy is a better prospect for homeowners struggling with a mortgage on a rental or investment property, in which case a bankruptcy judge does have the power to enforce a modification.
There is also some anecdotal evidence that filing for bankruptcy can put a mortgage lender in a position that prevents them from allowing or being inclined to modifying a home loan. With the federal government’s insistence on lenders to negotiate new manageable terms on home loans, pursuing a loan modification should be the better option to preventing foreclosure.
