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Will filing for bankruptcy allow me to avoid foreclosure?

by Dorota Trzeciecka on December 28th, 2009

Clients often ask whether filing for bankruptcy will allow them to avoid foreclosure.  The short answer is, it depends.  It depends on whether you can cure the past due indebtedness and make future mortgage payments.

If you are already in foreclosure, foreclosure will be automatically stayed, whether you file Chapter 7 or Chapter 13.  It means that the lender cannot pursue any legal action against you without first seeking a lift of the automatic stay from the bankruptcy court where your case has been filed.

You can avoid foreclosure in Chapter 7 if you are able to cure the indebtedness and bring your payments up to date.  That means that you have to pay all the past due payments, interest and penalties, typically prior to the initial meeting of creditors, the so called 341 meeting.  If you are unable to bring your payments up to date, and cannot afford to make future payments, your home will become part of the bankruptcy estate and will be sold by the bankruptcy trustee, together with any other non-exempt assets.  The non-exempt asset is any personal property that you have to turn over to the bankruptcy trustee.  There is, however, some property you will be allowed to keep, also called exempt property.  Bankruptcy trustee then sells all the non-exempt assets and distributes money to the creditors, who are paid in order of priority.  Typically, secured creditors get paid before unsecured ones.

Chapter 13 is designed for individuals who want to save their homes from foreclosure.  In Chapter 13, you can avoid foreclosure by including the arrearages, or the past due payments you owe on your mortgage, in your three or five year Chapter 13 plan.  At the same time you have to continue making your regular monthly mortgage payments.  You can make both the arrearages payment under the plan, and your regular monthly mortgage payments, to the bankruptcy trustee.  In chapter 13, you can also strip your wholly unsecured second mortgage.

Ms. Trzeciecka has been a licensed attorney since 1996 and is a member in good standing of the Florida Bar and a member of Miami-Dade County Bar Association.  Ms. Trzeciecka practices in the areas of consumer bankruptcy and alternative dispute resolutions.

From → Foreclosure

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