Filing for a Chapter 13 Bankruptcy is one of the best ways to permanently stop a foreclosure. The reason for this is simple: because the creditors have no choice but to stop the foreclosure once you file and your Bankruptcy allows you to put together a “plan” to stay in the house.
The Automatic Stay
The first reason why it stops the foreclosure is the Bankruptcy Automatic Stay. The Automatic Stay is like a stop sign that prevents creditors from taking any collection activity against you (with limited exceptions). This includes anything from a phone call and letter all the way up to stopping a foreclosure action. Once you file the Bankruptcy petition then the foreclosure action is STOPPED.
The Chapter 13 Plan
As the debtor you are responsible for submitting a plan or reorganization to your creditors. In this plan you will let the creditor know how you plan to treat (or pay back) their claim. When you are behind on your mortgage, and still desire to stay in the house, then you are required to pay back the arrears (what you are behind) back to the mortgage holder. The good news about this plan is that you can take that amount an stretch it over a period of up to 60 months. This allows a pretty good chunk of money to spaced out into much more manageable monthly payments. This is beneficial for the debtor because, outside of the Bankruptcy, the mortgage company will want the arrears to be paid back in a much faster time period.
As the Debtor you want this plan to be “confirmed” by the Bankruptcy Judge. Once is is confirmed then the mortgage company has no choice but to accept this plan that you have proposed. Here is what the Judge will want to see in order to “confirm” your plan:
- That you can afford to make the regular normal payments after the case is filed to the mortgage company.
- That you have actually made your payments to the mortgage company since the case was filed.
- That you can also afford to make your Bankruptcy plan payment.
- That you have actually made these Bankruptcy plan payments since the case was filed.
Joe has been served with foreclosure papers because he has missed he missed 6 months of mortgage payments from being temporarily unemployed. He is behind $10,o00 with interest penalties right now. His normal monthly mortgage payment is $1500.
Joe can file a Chapter 13 Bankruptcy and stop the the foreclosure to keep his home. Joe will have to show his budget to the Court which demonstrates he can pay his regular payment to the mortgage company ($1500) plus $167 extra per month to be paid through the Bankruptcy payment ($10,000 divided by 60 months).