If you’ve never filed bankruptcy before, it might seem confusing. A lot of people misunderstand how bankruptcy works. It doesn’t always forgive you for a mortgage problem.
What Will Bankruptcy Fix?
Bankruptcy affects every factor of your financial situation. You have more than your home on the line. Chapter 7 bankruptcy is mostly for debt forgiveness, and Chapter 13 acts the same way a giant “pause” button would.
All Chapter 7 does is keep your lender from holding your debt over your head. Chapter 13 will freeze your lender for a while (called an automatic stay), so you can get things in order. Neither kind of bankruptcy actually helps you keep your home.
What is an Automatic Stay?
An automatic stay is a process the court will grant you during bankruptcy. This is a temporary action that will stop the process of your foreclosure. It works by keeping things from getting worse while you’re working things out.
Some lenders will abide by the automatic stay, but they don’t have to. If they want, they can file a motion to lift the stay. When the court grants the stay, your lender is free to do whatever they want.
If you filed under Chapter 13, you can negotiate new terms with your lender under a resolution plan. Ideally, your plan would be restructured in a way that would make it easier to pay off your lender.
You won’t be forgiven for your debts, but you’ll be able to negotiate a different payment plan and time frame. You’ll agree to terms with your lender, and you may be able to avoid foreclosure as long as you hold up your end of the deal. Essentially, Chapter 13 is a second chance to do things the right way.
What if I Have Multiple Mortgages?
Chapter 13 can make second and third mortgages disappear. Your first mortgage is tied to an asset, which is your home. Second and third mortgages are stacked on top of an already existing asset. Since the home belong to the bank, bankruptcy can call multiple mortgages unsecured.
All of the equity of your home is tied up in your first mortgage, which makes additional mortgages tied to nothing.
Can I File For Bankruptcy?
You may not be eligible to file for bankruptcy. If you are, you can still worsen your situation by doing so. If your income is at or above the median income in your state for a family of the same size, you can’t use Chapter 7 bankruptcy.
The court will inspect your income. If the court decides you make enough to cover expenses plus a payment plan under Chapter 13, you only get Chapter 13.
When you file, you also run the risk of losing your belongings. You will only be allowed to keep a preset amount of money, and your assets count towards this figure. The court is working to make things fair between you and your lenders, and it’s their responsibility to attempt to mend what they can.
Basically, if you own a real diamond bracelet that is worth more than what you are allowed to keep, your lender can take it.
How Does Bankruptcy Affect My Credit History?
If you’re looking to rebuild your life after a foreclosure, and a reasonable chapter 13 payment plan cannot prevent the process, you’ll find yourself in a real dilemma. Foreclosure looks awful on paper, and it may become impossible for you to secure another mortgage in the future.
If you don’t file bankruptcy, you’ll not only carry the foreclosure, but the debt associated with it.
Bankruptcy has a negative effect on your credit score, but it’s also easier to rebound from. You’ll take a significant loss in points, but you’re also walking away from the situation without any debt. With no outstanding debt, it’s easier to rebuild your credit from the ground up.
You may be dealing with higher interest rates and lenders may offer you lower amounts, but you’ll be able to hide your foreclosure and truly start new.
How Can I Use Bankruptcy to My Advantage?
Chapter 7 only helps when there is absolutely no way you’ll be able to pay off your lender. You won’t get your home back, but you’ll have an easier time getting a new home and rebuilding your credit when you’re in a better financial situation. Chapter 7 is only a bandage – not a cure. If you’re eligible to file for Chapter 7, use it as your last resort when you’re sure you’re trapped.
Chapter 13 is the most helpful of the two options. You may actually be able to save your home by filing for Chapter 13, but the debt won’t disappear. You’ll still be responsible for paying off your lender in a timely manner, but the terms may be more manageable.
If your financial trouble is only temporary, Chapter 13 bankruptcy may be exactly what you need to get yourself back on the right track. Just be sure to never default on your payments again, or you’ll wind up right back at square one.
Ultimately, there is no form of bankruptcy that will allow you to keep your home while forgiving you from the debt you owe. In some cases, many home owners simply decide to sell their homes to cash buyers to regain financial compensation to pay off their debts. Since bankruptcy will affect every area of your life, you should never take the situation lightly or treat it like an ideal solution to the issue of your foreclosure. Make sure you’ve investigated all of your other options before you decide that bankruptcy is a good choice.