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Using Bankruptcy to Stop Foreclosure

Chapter 13 Bankruptcy Can Be Used to Stop a Home Foreclosure and Get Those Payments Up to Date

The housing bubble has burst a few years back. Many people with unfavorable mortgage terms are finding it more and more difficult to keep up with payments. Adjustable rate mortgages (ARMS), a huge number of which were written in the last four to five years, have raised interest rates higher than many mortgage holders can afford.

The holders of other subprime mortgages and “exotic” products like interest-only mortgages have found it more and more difficult to negotiate to refinance terms.

chapter 13 bankruptcy
chapter 13 bankruptcy

While many people are walking away from their dream homes and high-priced mortgages, others are determined to stay in. Some mortgage lenders, like JP Morgan Chase and Bank of America, have announced plans to reduce or place a moratorium on foreclosures and to negotiate interest rate cuts, at least in the short term.

These plans will affect only a small percentage of mortgages, many of which are owned by investors, not the bank or company who accepts your payments and services the loans.

For those not lucky enough to fall under one of those umbrellas, another option may stop foreclosure, even on the very day the foreclosure is scheduled, give you a little breathing space and get you caught up on your mortgage payments, as well as other delinquent payments. It may even allow you to eliminate credit card debt and other unpaid personal debt like medical bills.

It’s called Chapter 13 bankruptcy

Do not be put off by the name. Yes, this is a form of bankruptcy, but it does not require liquidation of your assets. Instead, Chapter 13 requires that you consolidate much of your debt into a monthly payment that you make to Chapter 13 trustee for a period of usually five years.

The trustee then distributes your payments to creditors according to a plan you file with the U.S. Bankruptcy Court and claims on that money filed by your creditors.

Here’s how it works:
Once a Chapter 13 bankruptcy case is filed with the bankruptcy court, the bankruptcy laws provide that no legal action can be taken against you or your property without court permission.

This is called the “automatic stay”, (“stay” being another word for injunction). The good news for those in foreclosure? The filing of a bankruptcy case will stop even foreclosures, and even on the day, the foreclosure is scheduled as long as it is filed before the actual foreclosure sale occurs.

Once the case is filed, you will be required to file a plan of repayment with the court. The plan will provide that you begin making your regular mortgage payments – usually beginning on the next scheduled payment date.

Some bankruptcy courts will have you make your mortgage payment to the Chapter 13 trustee, who will, in turn, pay the mortgage servicer. Other courts allow you to make your payment directly to your creditor.

Here’s the good part.
All those delinquent payments you’ve missed can be paid back over the course of five years. The repayment plan will calculate how much needs to be paid back, along with other loans like car loans that might also be delinquent.

To the extent your budget will allow, you might also be required to pay back all or a portion of the unsecured debt (credit card balances, medical bills, personal loans, etc.) that you owe.

Here are two important bonuses.
If you qualify, you may be able to use your Chapter 13 plan to renegotiate high interest rates on car loans. In addition, once your plan is approved by the court, any unsecured debt that remains unpaid at the end of the five year repayment period may be forgiven (bankruptcy lawyers call that “discharged.”)

Chapter 13 bankruptcy is not an easy row to hoe.
You will be required to stick to a strict budget. If you become delinquent in your plan payments, your case might be dismissed. If you get behind on your house payments, the lender can petition the court to allow it foreclose anyway.

But, if you’re able to successfully complete your repayment plan, you’ll emerge from Chapter 13 bankruptcy with a current mortgage, perhaps a paid off car, and much less unsecured debt.

Great! How do I get started?

Although it is possible to file a Chapter 13 bankruptcy without the help of a lawyer, no one would recommend it. Chapter 13 is complex, and there are many pitfalls for the unwary. An experienced bankruptcy attorney will
know the right steps to take.

Even if you don’t have the money to pay an attorney, most attorneys do not charge for an initial consultation. If you and your bankruptcy attorney decide that Chapter 13 is the best solution for you, most Chapter 13 repayment plans can be set up to allow you to pay your attorney over time through the plan payments. In some cases, even the filing fee charged by the bankruptcy court can be paid in installments.

The important thing to remember is that you must act quickly. The Bankruptcy Code requires that you receive a session of credit counseling to help you in making this important decision.

If you wait till the eve of foreclosure, it may be too difficult to obtain proof of that counseling and to gather enough information to make the bankruptcy filing possible.

Where do I find a qualified attorney?

An excellent source is the National Association of Consumer Bankruptcy Attorneys, www.nacba.com, which keeps an up-to-date database with information on its member attorneys. You can also contact your local bar association, which keeps a list of referral attorneys.

Credit Consolidation Versus Bankruptcy

A consumer who is finding her monthly financial obligations too much to handle will start to consider options such as credit consolidation or even bankruptcy. Before you start talking to a lawyer about declaring bankruptcy, you should take the time to understand how debt consolidation compares as a financial debt management option.

bankruptcy sign
bankruptcy sign

Filing for Chapter 7 or Chapter 13

Bankruptcy is normally done as either a chapter 13 filing or a chapter 7 filing. A chapter 13 filing is one in which the consumer is allowed to keep most of his assets, but has to pay off his debt according to a court-mandated plan.

A chapter 7 bankruptcy forces the consumer to liquidate all assets that are not considered exempt, and then that money is applied toward paying off debt. Exempt items include certain pieces of furniture, work-related tools, and vehicles.

The first problem with bankruptcy is that you have to qualify for it. You file a petition with the courts, submit all of your financial information and then hope that the court determines that you qualify for bankruptcy.

You do not need to qualify for debt consolidation. If you have two or more high interest credit card accounts, and you want to consolidate them, then you can.

Choosing Credit Consolidation

Credit consolidation is something you can do on your own without damaging your credit score. You can get a personal loan or home equity loan, pay off your debt with it and then start making your loan payments.

You may actually improve your credit by consolidating it. Bankruptcy ruins your credit rating for a period of eight to 10 years.

After a bankruptcy filing, you will find it extremely difficult to get financing for years. If you need to buy a new home because of a work transfer, then you may not be able to get a new mortgage and would have to rent a place to live.

As long as you keep your debt under control and your credit is good, you should not have any problem getting approved for financing after consolidating your debt.

Debt management can seem overwhelming and the choices can seem frustrating. Understanding the basic differences between debt consolidation and bankruptcy can help you to make the right decision for your situation. It could be that a credit consolidation loan is a very good financial decision for you.

Be sure that you investigate all of your options thoroughly and know when it is time to consolidate instead of taking the extreme step of bankruptcy.

6 Costly Mistakes to Avoid in Bankruptcy

There comes a time in many people’s personal finances when it is necessary to consider bankruptcy. If you find yourself in this situation, you need to avoid making common mistakes.

Always seek the help of an attorney

The first mistake and the one that stands out above others is attempting to file for bankruptcy on your own. Some people believe that they can save money doing this work themselves. It is true; you will save on attorney’s fees at least in the beginning, but when a creditor sues you because you have made a mistake, not having an attorney will be costly.

Also not knowing which debts can be discharged and which assets are protected can also be costly. On top of all of this, there are two different types of personal bankruptcy and you must qualify for the one you are filing for.

Always get help from an attorney firm for bankruptcy. Many people worry that they can’t afford help, but bankruptcy attorneys understand this. They are likely to arrange a payment plan.

Not listing all debts

This is a mistake that can come back to bite you. If a debt is not listed, it will not be covered under the bankruptcy. You will be responsible for paying it back in full.

Not listing all assets

If you fail to list all of your assets, your bankruptcy can be overturned. Always speak to an attorney because some assets are protected during bankruptcy. You may be attempting to hide something that you will not lose when filing for bankruptcy.

Transferring assets to family members

Many people think they are smarter than the court system and will transfer assets to a mother, brother or sister. Keep in mind that this is illegal and can be easily reversed by the courts. Leave all of your assets alone. Let the bankruptcy judge decide what to do.

Not paying your debts

Many people stop paying their debts once they have decided on bankruptcy, but they may not even qualify. Consult with an attorney before you did something like this.

Not listing all of your income

When this is done and you are caught, your bankruptcy can be voided; you will then have more than a financial problem to worrying about.

All of these tips can be summed up by remembering to use an attorney and follow his or her advice. In addition, disclose your financial situation to your attorney and do not lie. Honesty is the best policy with your attorney. They are bound by client confidentiality and are working in your interest.

Buying A Condo While Recovering From Bankruptcy

Banks have tightened their lending requirements significantly since the recession, and because of this, many people with good credit have a difficult time getting a loan for a new condo. You will have an even harder time if your credit isn’t very good. However, you may still be able to get a loan if you take the right steps.

Here are some things you can do to improve your chances of getting a loan for your new condo.

condominium
condominium

Prepare Your Financial Documents

You will need to collect all your financial information before you even think about applying for a loan. You need to have every document that shows a proof of income. This includes:

  • W2s
  • Tax returns
  • Pay stubs

You will also want to show all your banking statements. This will be necessary for everyone looking for a loan. However, it will be even more important if you have bad credit or have filed for bankruptcy. Your lender will want to see that you are doing a better job saving your money.

Show that You Are Turning Your Life Around

Lenders will not necessarily preclude you from receiving a loan for your new condo. However, they will be a lot more skeptical about your ability to repay your loan. You will need to prove to them that you are being more responsible and are going to repay your debt.

Here are some things you will need to do to alleviate their concerns:

  • Show that you are working to improve your credit. Pay all of your bills on time and do not max out your lines of credit. I would try to avoid using more than 20 percetn of your available credit at any one time.
  • Try to pay down your post-bankruptcy debts as soon as possible.
  • Don’t apply for a loan until after you have been working a stable job for at least a year. Your odds will be higher if you wait at least two years before applying.

The deck will be stacked against you, but you can increase your odds of receiving a loan if you take these steps.

Consider Getting a Cosigner

People who have bad credit may have a much more difficult time getting a loan on their own. You may need to have somebody else cosign for you. However, you will need to make sure that you understand the responsibility. The cosigner’s credit will be hurt and they will be hassled by creditors if you don’t pay your loans. Make sure you find somebody who trusts that you have turned your life around and make sure you don’t let them down.

Apply for an FHA Loan

The Federal government can secure loans for some people who are classified as riskier lenders. They work with a variety of lenders and will do what they can to help you get a loan. They may also help you borrow money without a much higher down payment.

You Can Buy a Condo after Bankruptcy

Filing for bankruptcy doesn’t need to destroy your life. You will still be able to buy a new condo or home. There are a number of programs that can help you, but the most important thing is to show that you are working hard to turn your life around.

Warren Paine

Warren is the senior mortgage loan officer who has worked in mortgages and loan industry since 1995. He study in Harvard and major in Finance with a Bsc. Honor Degree. He possesses a Paralegal Certificate as well.

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