Eliminate Second Mortgages
In the event your home is secured by more than one mortgage and your home is “under water” (worth less than the amount of the mortgages), the filing of a chapter 13 bankruptcy may eliminate your obligation to pay the second mortgage.
A mortgage is a debt that is secured by a lien on your home. In the event the value of your home has gone down to the point that the equity in the home is equal to or less than the first mortgage, the second mortgage is now theoretically unsecured. The filing of the chapter 13 bankruptcy allows the court to “strip off” the second mortgage and have the second mortgage dealt with as unsecured debt. This would put the second mortgage in the same category as credit card debt. The second mortgage holder will receive significantly less than 100 cents on the dollar in most chapter 13 bankruptcy plans.
Chapter 7 and Foreclosure
The filing of Chapter 7 Bankruptcy will also create an “automatic stay” with regard to the foreclosure of your home. This will tie up the sale of your home and/or the foreclosure from moving forward for a minimum of two to four months. This will give you breathing room to try to work out a mortgage modification or take other action to deal with your financial circumstances.
Stay In Your House
During the course of filing a Chapter 7 bankruptcy, you can live in your home while the bankruptcy is pending and make arrangements for your relocation. A Chapter 7 bankruptcy will eliminate all the debts secured by your home. For example, suppose you owe $300,000 on your mortgage and your house sells for $200,000 in the foreclosure sale. In theory, you would still owe $100,000 to the bank. The filing of the chapter 7 bankruptcy would eliminate this debt.
It should be noted that a filing of a chapter 7 bankruptcy could cause you to lose your home if there is equity in it (value over and above the mortgages). There are eligibility requirements to file a Chapter 7 bankruptcy. The eligibility requirements are spelled out under the BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005, which was passed by Congress. Bankruptcy is a federal proceeding. There are very specific income eligibility requirements, under what is called a “means test”, which a debtor must meet prior to becoming eligible for filing a Chapter 7 bankruptcy.
Our office can help you with any questions or concerns you may have regarding the use of a bankruptcy to stop or delay a foreclosure proceeding.