Mortgage loans are often the largest debts people ever assume. Homeowners may spend three decades or even longer repaying the principal balance and interest accrued on their mortgages. The home itself serves as collateral for the loan. The lender has the legal right to foreclose on the property if the owner misses multiple payments back-to-back.
Individuals who have fallen behind on their mortgages or who cannot fulfill all of their financial responsibilities because of their mortgage payments may want to consider filing for personal bankruptcy. Chapter 13 bankruptcy, in particular, can be helpful for those who have missed mortgage payments or who struggle to make mortgage payments because of the terms of their loans.
How can a Chapter 13 bankruptcy filing help people who are at risk of foreclosure?
Filing delays foreclosure
A lender theoretically has the right to initiate foreclosure proceedings once a homeowner has missed four or more payments. Typically, those facing foreclosure have to pay the full amount they owe to bring their loans back into good standing. Doing so can be very difficult for those with reduced income or particularly high mortgage payments. The automatic stay provided when a person files for bankruptcy can delay foreclosure proceedings and provide an opportunity to bring the loan back into good standing.
Filers can modify their loans
A Chapter 13 bankruptcy involves a repayment plan. The filer negotiates with creditors to reduce what they owe through a series of structured payments managed by the court-appointed trustee. Mortgages and other secured loans receive special attention during Chapter 13 proceedings. Lenders may have more reason to work with homeowners to modify their loans. There are even special programs run by the courts to help facilitate mortgage modifications during Chapter 13 bankruptcy cases.
A discharge can change a household budget
The repayment plan for a Chapter 13 bankruptcy typically lasts between three and five years. Once the filer completes all of their payments, they can discharge the balances still owed on their eligible unsecured debts. Eliminating credit card balances and medical debt may make it significantly easier for filers to keep their mortgages in good standing.
People who have experienced temporary financial challenges due to unfavorable mortgage terms, increasing cost of living expenses or reductions in income may find that Chapter 13 bankruptcy helps them to improve their circumstances. Taking action before a lender forecloses can help people protect their most valuable resources.
