How to File Bankruptcy to Stop Foreclosure

If you have fallen behind on your mortgage payments and cannot currently catch up, you may be facing foreclosure from your lending institution. If you are unable to come to an agreement with your lender, filing bankruptcy is an option to stop or at least delay foreclosure.

Difficulty: Challenging

Instructions

Things You'll Need:

• Income tax statement
• Lawyer
• Proof of current income

1. Either a Chapter 7 bankruptcy filing or Chapter 13 bankruptcy filing will stop the foreclosure process, at least temporarily. Upon filing, the court issues an Order for Relief that includes an “automatic stay,” which demands that all creditors, including your mortgage lender, stop collection activity. Even if your house is already scheduled for a foreclosure sale, the sale will be stopped while bankruptcy is pending, which can take two to four months.

2. You will need to hire an attorney who specializes in bankruptcy. Find attorneys who offer a free consultation, typically mentioned in the firm's telephone book advertising. An attorney can advise you whether Chapter 7 or Chapter 13 is the best solution for your situation. Many of these attorneys also specialize in alternatives to bankruptcy, and it is a good idea to take a solid look at these possibilities, because bankruptcy typically is a stressful and upsetting event in one’s life and has a long-term impact on one’s credit.

3. Chapter 13 is the best option for keeping your home if you have a way to make up the payments in the future but have been unable to work out an agreement with your lender. This option also has less impact on your long-term credit rating, because it provides a way for you to pay your creditors over time, usually three years. You must have sufficient income to make these payments.With Chapter 13, you will make your current mortgage payment each month along with part of the “arearage”–payments you have missed–over three years. You must keep up with these payments or the mortgage lender can ask the court to lift the bankruptcy protection, and begin the foreclosure process again. If you have taken out a second mortgage on your house, Chapter 13 also may eliminate that mortgage entirely if the second mortgage is not secured by your home value, due to a drop in property values or other circumstances. The court will then determine the second mortgage as unsecured debt, which takes a lower priority in the bankruptcy process and sometimes does not have to be paid back at all.You will have to show proof of income in order to obtain a Chapter 13 filing.

4. Chapter 7 completely cancels all mortgage debt, second mortgages and home equity loans. It also eliminates all unsecured debt. You cannot keep your home if you file Chapter 7--it only postpones the foreclosure, but it at least gives you some time to find other living arrangements. Typically during the two-to-four-month bankruptcy process, you can continue to live in your home, and sometimes even longer.

Tips & Warnings

• The American Bar Association reports that 96 percent of homeowners who declare Chapter 13 bankruptcy eventually lose their home to foreclosure. These people then have both a bankruptcy and a home foreclosure on their credit record. Thus, you need to be certain that you can make payments as scheduled due to the Chapter 13 protection.
• Because of its long-term impact on credit, and because it is a very stressful event in a person's life, bankruptcy protection should only be used if you are in difficult enough circumstances that there really is no other option.