There are a lot of companies or people that will tell you that filing for bankruptcy will stop a foreclosure. Well, this is only partially right and most of them won't tell you this because it endangers their chance to make money off your case. If you know these terms you'll be miles ahead of most people walking into a bankruptcy lawyer's office.
Automatic Stay - Once you file for bankruptcy, the bankruptcy court will create what's called an automatic stay to prevent your creditors (including your mortgage lender) from taking any action to collect debts from you. This will stop the foreclosure for the time being. There can be limitations on this stay if you've filed for bankruptcy within the past 12 months, but these limits can also be adjusted by the court if they judge your case as being filed in good faith. Discharge - A discharge of debt eliminates your legal obligation to pay for discharged debts. All debts are not discharged in a bankruptcy, though. Credit cards, medical bills, and back utility debts are usually discharged. Child support, alimony, most student loans, court ordered payments, criminal fines, and most taxes are not. Exemptions - There are certain items (which vary from state to state) that are protected by the court, which means they cannot require you to sell these assets to pay into the bankruptcy plan. Exemptions usually include protection for equity in your home (not the home itself), your car (one car is protected per income-producing person usually), and your household goods. In most consumer bankruptcy cases, nearly all of the debtor's property is exempted. Chapter 7 Liquidation - This discharges most unsecured debt without payment. As discussed above, your mortgage debt is usually discharged as well. However, this does not keep a lender from foreclosing because your mortgage is secured by a lien on your home. If the mortgage isn't paid, they can take your home...even if you're no longer legally obligated to pay for the mortgage. While your other debts are unsecured, your mortgage is secured, which is why they can still foreclose after the bankruptcy. Chapter 13 Repayment Plan - Allows you to repay your creditors (either in part or in whole) over time. Repayment plans typically span from 3 to 5 years, which is longer than most forbearance or repayment plans you can negotiate with your lender. However, homeowners very frequently cannot make these payments and wind up back in foreclosure within a year. A Chapter 13 bankruptcy can add hundreds of dollars of required payments to your budget every month because as soon as you enter the repayment plan you have to begin paying: 1. Your original mortgage payment, 2. Unsecured debts not part of the repayment plan, 3. A court-ordered repayment plan payment, and 4. Your normal monthly bills Reaffirmation agreement - An agreement made during bankruptcy in which you agree to remain legally obligated to pay some or all of a debt that could have been eliminated. These are usually not required in a Chapter 13 cases because debts are not discharged. If you file for a Chapter 7 bankruptcy and your mortgage is current when you file, your lender may ask for a reaffirmation agreement.
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