Can Bankruptcy Keep My Family Safe at Home?

Most mortgage lenders are willing to overlook one or two missed payments, especially if the borrower has a good credit history. Technically, however, banks can initiate foreclosure proceedings after just one missed payment. That’s especially true in non-judicial foreclosure states like Indiana. Home foreclosure in the Hoosier State has almost no judicial oversight.

Once the foreclosure wheel starts turning, it’s very difficult to stop it. Once banks send acceleration notices, which they usually send immediately, they stop accepting partial payments. So, the borrower’s financial hole gets deeper every month. Furthermore, promised lifelines, like loan modifications, often fail to appear.

In many cases, Chapter 13 bankruptcy is a last resort. But when the bank threatens to take your house, this federal debt relief program moves atop your list of options. Bankruptcy helps in three main ways, as outlined below. But only people with experienced representation are able to take full advantage of bankruptcy’s benefits.

Automatic Stay

Judges often block foreclosures if there is evidence of lender fraud or a serious violation of the 2012 National Mortgage Settlement agreement. The NMS prohibited a number of unfair lending practices which are not technically fraudulent, such as dual tracking (pursuing foreclosure while evaluating the borrower for mortgage modification relief).

Bankruptcy’s Automatic Stay is different. Distressed debtors need not prove fraud or any other type of misconduct. In fact, debtors need not even cite Section 362 of the Bankruptcy Code in their voluntary petitions. In most cases, the Automatic Stay takes effect the moment of filing and remains in effect until the moment the judge closes the case. So, the Automatic Stay is essential to the protected repayment period. More on that below.

Section 362 does not just apply to home foreclosure. It also applies to all other forms of adverse creditor action, such as:

• – Repossession,
• – Wage garnishment,
• – Harassing moneylender phone calls, and
• – Civil collection lawsuits.

Creditors can only get around the Automatic Stay if the debtor threatens the collateral in some way. Threatening to burn down the house qualifies as such. Threatening to move out does not qualify, in most cases.

Protected Repayment Plan

Depending on the debtor’s income, the protected repayment plan could last up to five years. Each month, debtors make a debt consolidation payment to the trustee (person who oversees the bankruptcy for the judge). The trustee then divides this money according to a preset legal formula and distributes it among creditors. When the protected repayment plan ends, the homeowner has a zero past-due balance. That’s the essence of a fresh start.

As long as the debt consolidation payments completely eliminate mortgage arrearage before the protected repayment period ends, creditors usually cannot object to it. They must wait in line for their money like everyone else.

Debtors have a great deal of flexibility during the protected repayment period. If they cannot afford the debt consolidation payments, they can convert to Chapter 7. And, if they want to pay the debt off early and emerge from bankruptcy sooner, they can do that too.

Cram Down/Lien Stripping

Stripping and cramming sound like two things you tell your children not to do at the dinner table. But in this context, these little-known bankruptcy loopholes often help you remain safe at home.

Cram downs are a good option in some cases, especially if the UPB (Unpaid Principal Balance) is rather low and the home’s fair market value has declined. If bankruptcy debtors elect this option and pay the full fair market value by the end of the bankruptcy, they might own the property free and clear.

Lien stripping often involves recategorizing a HELOC (Home Equity Line of Credit) from a secured to an unsecured debt. If the home’s value is not high enough to secure the first and second mortgage, the second mortgage becomes a dischargeable unsecured debt. That change could save your family thousands of dollars.

Reach Out to Experienced Lawyers

Chapter 13 is an excellent option for distressed debtors. For a free consultation with an experienced Chicago Chapter 13 bankruptcy lawyer, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.