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Chapter 7 Bankruptcy to Delay Foreclosure
If you face foreclosure currently, chapter 7 is a less common method to prevent foreclosure. Because most people want to save their home for the long-term, they tend to turn to chapter 13 as their method to stop foreclosure. Although Ch. 7 bankruptcy will not permanently prevent foreclosure by itself, filing for Ch. 7 can help in different ways.
How Chapter 7 Helps With Foreclosure
One example of how Ch. 7 helps with foreclosure comes in simply delaying the process. Additionally, filing chapter 7 can free up other money that can, in turn, be used to pay for the monthly mortgage payment. In situations where the homeowner is not extremely far behind on the mortgage and simply needs to clear other debt and spend a few months catching up, the chapter 7 bankruptcy is significantly better in the long run than a chapter 13 because it is much less cumbersome in the long run. In other situations where you plan to leave the home and simply need to buy time to prepare to move on, the chapter 7 allows you to discharge and eliminate taxes which you would otherwise be liable to pay based on the mortgage deficiency following the foreclosure sale.
The Automatic Stay From Chapter 7 Delays Foreclosure
When filing a Chapter 7 petition, almost all creditors become instantly prohibited in their collection efforts, lawsuits, and in this case, from foreclosing upon your home. The “automatic stay” is the court order from the bankruptcy court that accomplishes this. The Ch. 7 automatic stay applies to home foreclosures from your lender just like other collection activities. While your bankruptcy remains in progress for a period of 3-5 months, the lender may not foreclose unless they seek and obtain a motion to lift stay. Once the bankruptcy has run to completion, the lender can once more continue the foreclose process.
Important Note Regarding Motions to Lift Stay By Mortgage Company
You need to also understand that a lender can and in many cases will file a motion to lift stay. In so doing, they request that the bankruptcy court lift the stay prior to your bankruptcy coming to completion. If they can prove that they are the legal mortgage holder or that they have deed of trust for your property, the bankruptcy court likely grant their motion to lift the bankruptcy’s automatic stay, thus allowing foreclosure to continue forward.
That begs the question regarding whether your lender holds the mortgage? In a court of law, to declare yourself the mortgage holder successfully they must prove the fact. You might consider that the lender and/or their law firm representing them in foreclosing upon your home can easily show their ownership of the mortgage or possession of the home’s deed of trust, yet this is simply not the case in a large amount of cases. Mortgages have often been originated from one company who then sells to another mortgage company, who then hires a third company to service the loan. Furthermore, the mortgage company holding the mortgage could have sold the mortgage yet again, and you can see that mortgages are bought and sold and lumped with other properties together. Through errors in electronic repackaging during recent years, the fact can come out that the actual institution which is attempting to foreclose on your home may not have the ability to provide proof that is required by the bankruptcy court to complete the foreclosure. In these situations, the bankruptcy’s automatic stay stays in effect.
This kind of victory can be temporary in nature as it typically only yields an additional one or two months’ delay in the foreclosure process. The judge can make the decision whether they grant the lender’s motion to lift the automatic stay after a few months have passed in the bankruptcy proceedings with a chapter 7 bankruptcy only lasting 3-4 months in most cases.
Benefit of Ch. 7 to Delay Foreclosure: Skipping Mortgage Payments Means Holding Onto More Cash
Delaying home foreclosure for just 2-3 months allows the borrower to hold onto precious cash. For example, if your home’s mortgage payment were around $1,500 per month, delaying foreclosure for just a 3-4 months can save you $4,500 to $6,000 during the bankruptcy period along. That can help you to build up funds and prepare for moving out and moving on with your life.
Even in cases where the bank is ultimately successful in having the court life the stay, the borrower can live rent-free and mortgage free for some additional number of months, relying on delays which are a normal part of the foreclosure process. After the completion of the bankruptcy, banks and other types of new owners often fail to immediately evict the borrower, resulting in that much more free months.
Tax Advantages of Chapter 7 in Foreclosure Situations
Chapter 7 cancels your mortgage debt along with other dischargeable debts that have been secured with your home. Home equity lines of credit, property taxes, HOA dues — even in cases where the liens from these debts stay in place will be erased for the homeowner. This comes with a distinct tax advantages from losing a home in foreclosure.
Normally, for someone who loses their home to the foreclosure process, the lender receives less when they sell the home after the foreclosure than the balance on the mortgage loan. Because the mortgage is under water, the difference between the balance and the foreclosure sale price is called a deficiency and is called “forgiven debt” for tax purposes so that the mortgage company can write it off as a loss. In many cases, taxes become due on this “phantom income” from the charging off of this mortgage deficiency debt. Yet, because the chapter 7 bankruptcy wipes out this debt when you receive the bankruptcy discharge, “forgiven debt” does not exist, for which you can be taxed. And in cases where forgiven debt has caused you to already incur tax prior to filing chapter 7 bankruptcy, a bankruptcy can still eliminate this tax debt associated with a former foreclosure.
Call (214) 617-2500 for a Free Foreclosure Consultation About Your Best Options
You are welcome to call our offices day or night, 24/7, 365 days/year. We make ourselves available because we know how stressful these situations can be. Often a quick conversation of just 15 minutes can alleviate your concerns, help you sleep at night, and provide you with much needed hope for the future. Call the Bright Law Firm of Richard Weaver today for information about how chapter 7, chapter 13, or some other foreclosure prevention options could help you with your situation! By Pete Maughan.