Yes, bankruptcy can stop foreclosure–but not without careful planning, and not without consequences. Read on to learn how to make this important decision.
Bankruptcy Stops All Legal Proceedings
Bankruptcy stops all civil legal proceedings, athought the word “stop” is not truly appropriate. The legal term is “stay”–bankruptcy stays all legal proceedings. A bankruptcy stay subsumes all civil legal proceedings against a debtor (including mortgages, loans, helocs, foreclosures, etc.); those legal proceedings become part of the bankruptcy. To learn more about foreclosure read Foreclosure Law | Stop Foreclosure.
Bankruptcy Means Many Things
Of course, bankruptcy has several Chapters within it available to consumers; there is a Chapter 7 bankruptcy and a Chapter 13 bankruptcy. A Chapter 7 bankruptcy is a liquidation event: you give up all your remaining non-exempt property (everything that isn’t protected by law, such as pensions, IRAs, etc.), and in return, all your obligations are wiped out. Chapter 13 is a different type of bankruptcy. A Chapter 13 bankruptcy is a repayment plan reorganization. You must plegle your disposable net income (after some reasonable expenses) for the period of the plan, usually 3 to 5 years. In return, you keep some or all of your property, and you pay at least something toward your debts. Chapter 13 takes 3 to 5 years to complete, depending on the plan.
Keep in mind that with bankruptcy “reform” under the Bush administration (don’t get me started) bankruptcy now includes “means testing,” where an applicant’s ability to pay is considered in whether Chapter 7 will even be allowed. So, one might be forced into Chapter 13 anyway.
A Bankruptcy Court Cannot Adjust Mortgage Rates (Yet)
Presently (Jan. of 2009), bankruptcy courts do not have the power to adjust mortgage rates or to adjust mortgage principal. However, the incoming Obama administration is working to give bankruptcy courts just that power. Keep an eye on this–if it passes, it will make bankruptcy a very attractive option for homeowners struggling with above-market interest rates on mortgages.
Bankruptcy As Leverage
Can a bankruptcy filing be used as leverage by a homeowner to gain some advantage over a bank? There are really two answers: possibly, and “ask your bankruptcy lawyer.” Each case will differ widely. There are two very strong reasons why a bankruptcy might induce a bank to retreat from a foreclosure posture. First, a bankruptcy will stay any foreclosure action; which means a lender has to sit and wait–all the while receiving no mortgage payments–through the bankruptcy proceeds. Second, there is always the risk that the bank might loose some rights within the bankruptcy proceedings. While a bankrtuptcy judge can’t specifically modify a loan, he or she can investigate claims against the lender such as lender fraud.
Every case will differ widely. Bankruptcy is best handled by a lawyer, so you might inquire with him or her if the option is right for you. Good luck.
Portions of this article were contributed by Medical Malpractice Lawyers.