Chapter 7 Bankruptcy
In any case, homeowners facing foreclosure cannot include their residence in a Chapter 7 filing. Chapter 7 is reserved exclusively for unsecured debt, such as credit cards, store cards, and personal loans. Because the mortgage is secured by the property, it cannot be discharged under Chapter 7. The clause in the mortgage documentation that prevents it from being included in a Chapter 7 case specifies that the mortgage loan is secured by the property itself. Chapter 7 bankruptcy does not discharge secured debt, so the mortgage and this variety of bankruptcy have nothing to do with each other.
Chapter 7 bankruptcy may, however, serve a purpose by releasing income that householders can use to stay current on their mortgage payments. Keeping a roof over their heads is far more important than financing a new television or piece of furniture, and credit card companies who refuse to work with householders in financial distress will bear the consequences of their poor lending decisions. Discharging the majority of these debts can liberate a substantial amount of cash that can be used immediately to reduce mortgage arrears or establish a repayment plan or other exercise program. Ineligible for these bank restructuring programs are homeowners with an excessive debt-to-income ratio; therefore, discharging a portion of this high-interest, unsecured debt through Chapter 7 may be a viable option for getting the mortgage back on track.
Chapter 13 Bankruptcy
The home can be included in a Chapter 13 bankruptcy filing, which is a reorganization of debt with a court-mandated payment plan, for homeowners who wish to halt foreclosure. However, if the house is already too expensive, it would not make much sense to consent to an expensive payment plan. In Chapter 13, mortgage payments may increase because householders are required to pay both the regular monthly mortgage and a portion of the amount in default. Defaulting on this form of bankruptcy almost always results in the house being repossessed and sold at a sheriff's auction.
Especially if they fall behind on their Chapter 13 payments, the homeowners will be in imminent danger of losing their residence. Bankruptcy does not halt the foreclosure process; it merely places it on hold and affords the owners court protection while they attempt to catch up. Therefore, if payments are not made as agreed, the bank will ask the courts to withdraw the stay and allow them to continue with the foreclosure process. And the lender will be able to resume operations as if the bankruptcy never occurred, picking up where they left off. This frequently results in a bailiff sale being scheduled within a matter of weeks.
Filing for bankruptcy to halt a foreclosure is a decision that homeowners must carefully consider and possibly discuss with a qualified attorney. Finding a method to sell the house, giving a deed in lieu of foreclosure, or allowing the bank to foreclose on the property is the only way to eliminate the mortgage and stop worrying about the property. The mortgage liens will be eliminated and the property will be transferred to the new proprietor at the sheriff's sale. The foreclosure will remain on the homeowners' credit reports for 7 to 10 years. During the foreclosure process, there are no easy decisions, but it is best to avoid confronting both foreclosure and bankruptcy on the same property.
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