You’ve fallen behind on your mortgage payments. Try as you may, you just can’t seem to make ends meet.
The hammer has come down: the bank keeps calling and you’re facing foreclosure.
If you don’t act quickly, you will lose your house. However, there are steps you can take to ensure you can stall the foreclosure and (hopefully) keep your house.
First Step: Seek Legal Counsel
The first step any homeowner should take when facing foreclosure is to seek out an attorney. An experienced attorney can help you determine whether you’ve exhausted all steps in stalling the foreclosure. They may be able to recommend less drastic steps (short sales, loan forbearance) to help you avoid foreclosure.
A lawyer will look over your finances and your loan requirements to determine if you’ve got any remaining cards on the table. If not, your lawyer will likely recommend a final last step: declaring bankruptcy.
How Bankruptcy Can Help: The Power of the Automatic Stay
When you file for bankruptcy, you will automatically be qualified for something called an “automatic stay.” This forces all of your collectors to immediately cease and desist any collection activities until further notice. This will generally buy you about three to four months before foreclosing activity resumes. While it’s not a universal rule (banks can petition to lift the stay sooner, etc.), the automatic stay can buy you precious time to get your affairs in order.
The Two Types of Bankruptcy
There are two ways to file for bankruptcy and get the automatic stay: Chapter 7 and Chapter 13. To determine whether you’re eligible to declare for Chapter 7 bankruptcy, you’ll need to take the Chapter 7 mean test. The means test was designed to determine whether you truly cannot pay your debts. The test measures your disposable monthly income; the lower your disposable income, the better chance you’ll have at eligibility.
Chapter 13 requires homeowners to lay out a repayment plan in which they pledge to pay off both their regular mortgage payments in addition to the late payments (called “arrearage”) that they still owe. However, Chapter 13 is often considered a better bet than Chapter 7 if you want to keep your home. Under Chapter 13, as long as you meet all the payments under your repayment plan, you’ll get to keep your home. Of course, you must ensure that you can meet the repayment plan without going into further debt.
Don’t worry about which type of bankruptcy is right for you just yet. Seek out legal advice to determine if declaring bankruptcy is an appropriate step for you to take. An attorney will then help you decide whether Chapter 7 or Chapter 13 is right for you.