I am repeatedly asked, “What is the fastest way to stop a foreclosure?” If you are facing foreclosure and have already fallen behind on your payments, have large amounts of credit card debt and are completely overwhelmed by debt, one of the most powerful tools available to you are the protections offered by our bankruptcy laws.
Bankruptcy law is Federal Law. Bankruptcies are handled by courtrooms and judges dedicated solely to bankruptcy cases. Bankruptcy courtrooms are dedicated to protecting the rights of debtors and in many instances the best interest of bankrupt debtors, in adherence to the Bankruptcy laws.
Seldom will a debtor find more relief and protection than in the bankruptcy forum. This includes protection from your mortgage lender. If you have tried for a loan modification and failed, tried to sell your house short and failed, tried to negotiate with your credit card lenders and failed, it is time to consider bankruptcy. There are many powerful tools that filing for bankruptcy can offer you.
Chapter 7 and Chapter 13 Bankruptcy
Many consumers will file for either Ch. 7 or Ch. 13. Usually, a Ch. 7 filing (a total liquidation) is the preferred choice, but if you have income and/or assets, you may not qualify. In order to qualify for Ch.7, your income must be below the median for your area of the country. A consultation with a local bankruptcy practitioner will determine whether you do or do not qualify for Chapter 7.
The Automatic Stay
The minute your bankruptcy petition is filed, all collection efforts by creditors must immediately cease. The filing of a bankruptcy petition creates an automatic stay (a federal court order) directing all collection efforts to stop. This stay not only applies to phone calls and letters, but also to foreclosures, evictions, wage garnishments, bank levies and other collection efforts. If a bankruptcy is filed before a foreclosure date the stay can stop a foreclosure sale from taking place. However, I do not recommend leaving any bankruptcy matter to the last minute. There is a fair amount of information which you must gather in order to file a petition properly, and ‘haste makes waste.’ Improperly filed papers could cause complications down the road and jeopardize your chances of obtaining a discharge of your debts.
If you do not qualify for a chapter 7, you may qualify for a chapter 13 filing. Though usually considered the second best choice for consumers, the chapter 13 filing offers the distressed homeowner many of the benefits of a ch.7 plus a particularly powerful tool known commonly as a “lien strip”.
What is a lien strip? Ch. 13 of the Bankruptcy Code gives the Bankruptcy Courts one of the most powerful tools to modify mortgage loans. Commonly referred to as a “lien strip” Judges in a Chapter 13 filing can essentially convert a junior mortgage holder into an unsecured lender, removing its lien from the home and lumping the lender in with all of the other unsecured lenders (like credit card companies). The end result is that the junior lender can no longer foreclose on your home and will most likely end up with whatever your estate can pay once most of your other creditors are paid.
A lien strip is simply this: If a property’s current value is less than that which is owed to the first mortgage holder, then any junior lien holders can be deemed unsecured. This scenario is very common in the current real estate environment. You may file a motion to deem all junior loans unsecured. An unsecured creditor takes least priority in a bankruptcy filing, going to the ‘back of the line’ with all other unsecured creditors such as credit card lenders. In addition, that creditor can no longer foreclose on your home.
If your home is now worth less than the amount which secures the first mortgage, you must file a motion to strip the second mortgage of its lien. Wouldn’t it be easier to come out of bankruptcy with a second mortgage that has been eliminated (or drastically reduced) and with no threat of foreclosure?
Bankruptcy can be a complicated area and a difficult choice for many. Each individual case is different and would require individualized advice. The above is in no way meant to constitute legal advice. The idea of bankruptcy may trouble you, but I strongly urge you to consider it if you are on the verge of losing your home to foreclosure.
Disclaimer: This article does not constitute legal advice. Each individual's case is different. Please consult an attorney for legal advice applicable to your case.