Homeowners struggling with mortgage payments have several ways to keep their house. One option, sometimes disregarded by struggling homeowners, is bankruptcy.
Currently it is not possible to force creditors to alter the terms of the mortgage through bankruptcy. However, for those borrowers who are going through bankruptcy, mortgage lenders may be willing to negotiate a loan modification. This includes reducing interest rates or allowing late payments to be added to the end of the loan, letting the homeowner become current on payments. Lenders can also be more willing to negotiate if you are represented by your bankruptcy attorney, who can help you understand where creditors are willing to compromise.
The largest benefit to filing bankruptcy is getting rid of unsecured debt such as credit cards. The money saved from not having to pay interest on large credit card debt can allow a homeowner to invest more money into mortgage payments.
Another benefit is that during a bankruptcy foreclosure proceedings are immediately halted for a period of time. Brief protection from foreclosure - called an "automatic stay" - allows a homeowner some extra time to get current on mortgage payments.
In most cases, it is possible to protect your home from liquidation in a Chapter 7 bankruptcy. If you meet the homestead exemption, creditors cannot force a sale of your home during bankruptcy. This varies state by state, so contact an attorney to see if you meet the criteria. A Chapter 7 bankruptcy, however, will not create a payment plan to cure mortgage arrears. While a Chapter 7 bankruptcy will stay a foreclosure for a period of time, ultimately, if you are in foreclosure, the mortgage company will be able to continue with their foreclosure action after receiving permission from the Bankruptcy Court.
If you are behind on your mortgage payments, Chapter 13 bankruptcy can allow you 3 to 5 years to pay what you owe, while still making your current mortgage payments. This is usually the preferred Chapter to file when you are attempting to save your home.
Even if you are ultimately unable to keep your home, bankruptcy can give you a fresh start - and with less damage to your credit score than given by a foreclosure. Lenders will sometimes allow a new mortgage just 2 years after a bankruptcy filing, especially if there was a life-changing circumstance behind the bankruptcy, such as job loss or unexpected medical bills, rather than simple overspending.
Contact a bankruptcy attorney to see if bankruptcy is the right course for you, or for other possibilities to save your home.