If you have fallen behind on your mortgage, chances are that you are also struggling to pay other debts. When your lender begins to pursue foreclosure, you may be able to save your home by filing for bankruptcy.
Read on to learn more about how a bankruptcy filing impacts an impending foreclosure.
Delaying foreclosure proceedings
After you file for Chapter 7 or Chapter 13 bankruptcy, the court issues an automatic stay. This court order prevents creditors from contacting you and from pursuing further collection actions. If you are already behind on your mortgage payments, a bankruptcy filing will delay the foreclosure for several months.
This applies even if the bank has scheduled a pending foreclosure sale. Although the mortgage company can request that the court lifts the stay, this process still results in a delay.
Keeping your home
If you can no longer afford to make payments on your home, bankruptcy provides the time and space to line up a more suitable living arrangement. With Chapter 7 bankruptcy, a discharge results in the cancellation of mortgage-related debt and tax liability for a principal residence.
If you are able to catch up on payments, however, you can often arrange to keep your home after filing for bankruptcy. When you file a Chapter 13 bankruptcy, the court trustee and your attorney will collaborate on a plan to repay some debts and discharge others. If you can afford to pay both the past-due amount and your current mortgage payment after a Chapter 13 reorganization, you can successfully avoid foreclosure.
Discharging second and third mortgages
If you have more than one mortgage on your home, the bankruptcy court will treat the second and subsequent loans as unsecured debt. This type of debt is the last priority for repayment in Chapter 13 filing.
Maryland homeowners can retain up to $23,675 in equity in a bankruptcy filing. If you have equity exceeding that threshold, the trustee can require you to refinance or sell to repay other debts.