There are a wide variety of reasons people begin to consider filing for bankruptcy, from burdensome medical bills to credit card overuse to bad tax decisions. One common reason folks begin to consider bankruptcy is that they become unable to make their mortgage payments. But can a debtor really stop foreclosure by filing for bankruptcy?
It is possible for a debtor who is unable to make mortgage payments to save a home from foreclosure by filing for bankruptcy under the right circumstances. It depends on a debtor’s current income and overall financial profile, as well as the lender’s willingness to work with the debtor. It also depends on the form of bankruptcy one pursues.
Chapter 7 bankruptcy, which is the form that involves liquidating nonexempt assets and using the proceeds to pay off debtors, is less likely to allow a debtor to save his or her home, particularly when the relevant homestead exemption is small. Each state has different limits when it comes to the homestead exemption. Here in Florida, the exemption is up to $50,000 on a primary residence.
In cases where a debtor’s equity falls within the exemption, and he or she is caught up on mortgage payments, Chapter 7 may be able to help the debtor stop foreclosure and save their home. In reality, though, most people who file for bankruptcy are behind on payments and their homes are underwater, such that foreclosure will be inevitable. Chapter 7 bankruptcy could buy such debtors a bit of time to potentially work out an arrangement with the lender, but this isn’t often doesn’t work out.
For this reason, debtors who want to have a shot at saving their home in bankruptcy are usually steered toward Chapter 13 bankruptcy. Readers who have questions about this process should work with an experienced bankruptcy attorney to receive guidance and to ensure their rights are protected.
Source: National Bankruptcy Forum, “Will Bankruptcy Cost You Your House?,” Russ B. Cope, Oct. 29, 2013.