Avoiding Foreclosure Through Bankruptcy

Avoiding foreclosure through Chapter 13 bankruptcy

David Ebert, a bankruptcy attorney and partner with Ebert Law Office PC in Hurst, Texas, sid that most homeowners who resort to bankruptcy to avoid a foreclosure will file a Chapter 13 bankruptcy. A Chapter 13 doesn't actually wipe out the debt, serves to temporarily shield debtors from their creditors until a court-ordered repayment schedule can be worked out.

"It's intended for somebody who had a loss of income or a short-term decline in income," Ebert explained.

Once a Chapter 13 filing occurs, all debt collection efforts are halted for several months during what is called a forbearance period, during which a court will work out terms for repaying the debt. Usually, the court will set up a schedule over three to five years over which the debtor will repay the arrears, or debt owed.

Need to be able to maintain payment schedule

For a Chapter 13 to successfully avert a foreclosure, a homeowner must be able to pay off the arrearage while at the same time resuming his or her original mortgage payments - which can be a hefty financial burden. Otherwise, the property will soon fall back into foreclosure.

Ebert said it may be possible in some cases to work out a loan modification as part of the bankruptcy, thereby reducing the ongoing mortgage payments so the homeowner can more readily handle the burden of paying both the mortgage and arrears.

Another type of consumer bankruptcy is a Chapter 7, which Ebert said is rarely useful in avoiding a foreclosure or loss of other secured property. That's because while a Chapter 7 can wipe out unsecured debts, secured debts are tied to a specific asset - such as a mortgage secured by a home - which reverts to the creditor in a Chapter 7.