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Crushing Debt Alone

How bankruptcy can help during foreclosure?

No family in the Orlando area wants to lose their family home to foreclosure.

Aside from the embarrassment and having to find another place to live under difficult circumstances, a foreclosure can be a huge financial setback on many levels.

Finally, if the bank cannot sell off the property for the balance of the loan, the bank may take further collection action against the family, such as seizing other assets or garnishing wages. In other words, foreclosure does not necessarily end with the taking of a family’s home.

Bankruptcy can help families who have fallen behind on their house payments in a number of ways.

Automatic stay

In the vast majority bankruptcies that get filed, the individual or couple filing gets the benefit of the automatic stay.

The automatic stay, as its name implies, is a court order which takes effect automatically, that is, without the person asking for bankruptcy having to go in front of a judge or even ask for it. It prevents legal and other collection actions against a debtor, including foreclosure.

The automatic stay applies during the bankruptcy, so it can delay foreclosure and may require the bank to repeat some steps in the process.  The automatic stay can at least give a family some breathing room to work out a plan.

Deficiency judgments

Both Chapter 7 and Chapter 13 bankruptcies, if successful, will lead to a discharge of what are sometimes referred to as deficiencies. A deficiency is the amount of money owed on a mortgage, home equity loan, etc. which exceeds the sale price of the home.

In other words, after bankruptcy, a debtor is protected from further collection action by their banks or other home lenders. This is one reason why bankruptcy is particularly effective for dealing with second and third mortgages.

Discharge of other debts

Sometimes, the reason a family struggles to make the house payment is that they are trying to pay off other creditors who are perhaps more aggressive in their collection tactics.  Discharging other debts through bankruptcy may free up the income the family needs to save their home.

Chapter 13 and foreclosure

However, a Chapter 7 bankruptcy is very unlikely to stop a bank from foreclosing on the family’s home. After a Chapter 7 concludes, and even a during a Chapter 7 if the bank gets permission, a bank can still take a home if the family has not made payments as due. The fact that bank cannot pursue any other collection actions may be of a little comfort to a family losing its home.

A Chapter 13, on the other hand, can stop a foreclosure permanently.  As part of the required payment plan, the debtors can agree to tender makeup payments over their course of their plan so as to clear their delinquent loan. If they do so and keep up their regular house payments, the bank no longer has grounds to foreclose.

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