Bankruptcy is a federal court process designed to help consumers and businesses eliminate their debts or repay them under the protection of the Bankruptcy Court. Bankruptcies can generally be described as "liquidations" or "reorganizations." Chapter 7 bankruptcy is the liquidation variety: If you own property that isn't exempt under your state's laws, it may be taken and sold ("liquidated") to pay back some of your debt. Chapter 13 bankruptcy is the most common type of "reorganization" bankruptcy for consumers: You get to keep all of your property, but you must make monthly payments over three to five years to repay all or some of your debt.
To learn more about bankruptcy and how it affects your mortgage and credit, we’ve included excerpts from two articles, “How Bankruptcy Can Help With Foreclosure” and “Nora's Guide To Life After Bankruptcy” with links to the author’s sites.
How Bankruptcy Can Help With Foreclosure
Avoid or delay foreclosure of your home by seeking bankruptcy protection.
by Robin Leonard and Stephen Elias (Nolo)
If you are facing foreclosure and cannot work out a deal or other alternative with the lender, bankruptcy may help. If you get behind on your mortgage payments, a lender may take steps to foreclose--that is, enforce the terms of the loan by selling the house at a public auction and taking payment of your loan out of the auction.
This won't happen overnight. The foreclosure process typically starts after you fall behind on your payments for at least two months, and often three or four. That gives you time to try some alternate measures, such as loan forbearance, a short sale, or a deed in lieu of foreclosure. But if you've already tried and failed with these measures, you can consider bankruptcy as a possibility for avoiding or stalling foreclosure. Here are some ways that filing for bankruptcy can help you.
The Automatic Stay: Delaying Foreclosure
When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order (called the Order for Relief) that includes a wonderful thing known as the "automatic stay." The automatic stay directs your creditors to cease their collection activities immediately, no excuses. If your home is scheduled for a foreclosure sale, the sale will be legally postponed while the bankruptcy is pending--typically for three to four months. However, there are two exceptions to this general rule:
1) Motion to lift the stay. If the lender obtains the bankruptcy court's permission to proceed with the sale (by filing a "motion to lift the stay"), you may not get the full three to four months. But even then, the bankruptcy will typically postpone the sale by at least two months, or even more if the lender is slow in pursuing the motion to lift the automatic stay.
2) Foreclosure notice already filed. Unfortunately, bankruptcy's automatic stay won't stop the clock on the advance notice that most states require before a foreclosure sale can be held (or a motion to lift the stay can be filed). For example, before selling a home in California , a lender has to give the owner at least three months' notice. If you receive a three-month notice of default, and then file for bankruptcy after two months have passed, the three-month period would elapse after you'd been in bankruptcy for only one month. At that time the lender could file a motion to lift the stay and ask the court for permission to schedule the foreclosure sale.
Nora's Guide to Life After Bankruptcy
From Nora Raum, Attorney at Law
Bankruptcy does not mean the end of your credit life. You might feel you never want credit again. But that may be shortsighted. There may come a time in your life when you want or need credit so it's a good idea to think about it sooner rather than later. The following are a few suggestions that might help (excerpts):
Your first step is to find out what potential creditors will find out about you. You can get a free copy of your credit report once a year from all three credit reporting agencies. Call 1-877-322-8228 or visit www.annualcreditreport.com.
After your discharge has been entered, it is possible to get a loan to buy a car. You will most likely be paying a much higher interest rate. And you may have to come up with a bigger down payment. But it is possible to buy a car on time after bankruptcy. Stick with the major dealers, or better yet, try to get a loan from your bank or credit union.
Some places have strict rules that they won't rent to people with bankruptcies on their records. Others aren't so inflexible. It's a matter of shopping around. Be up front about the bankruptcy, of course. They're going to find out anyway. But be prepared to provide helpful information. Perhaps you could get a letter from your current landlord that all your rent payments have been made on time.
Yes, you can buy a house after having been through bankruptcy. Don't expect to right away, of course, but it's possible. Hang onto those your bankruptcy papers, the mortgage company will want to see them. Some mortgage companies won't want to talk to you, but if you've cleaned up your credit report and have one good credit reference (such as the secured card or your landlord), you'll eventually find a mortgage company that wants your business.
Once you have rebuilt your credit, don't go crazy. Don't apply for a whole lot of different things because each application will pop up on your credit report. Creditors get leery if they see someone who wants credit from everyone. And once you do get credit, make sure you make your payments on time. Never take on more debt than you can handle. Time will pass and some day your bankruptcy will be a distant memory. For the entire article go to: Nora's Guide To Life After Bankruptcy.
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