If a consumer’s home is being foreclosed because they are way behind on the payments, they should know that the moment they file a petition for chapter 13 the automatic stay goes into effect which immediately stops the foreclosure. To make the foreclosure go away permanently, they would have to consolidate all the payments they were behind on, including insurance, homeowner’s association fee and taxes and consolidate it into a plan that pays that full amount off over a time period ranging from 36 to 60 months. This chapter 13 plan payment is in addition to paying their regular monthly mortgage payment. It may sound difficult, but it gives people a chance to catch up on their mortgage and stay in their home for a very long time.
It may be possible to refinance to avoid the foreclosure at least in theory but that is not usually possible. The people who get into such big trouble already have a lot of other debt and ruined credit, which means they are unlikely to qualify for refinancing. Filing under Chapter 13 will stop everything and give them an opportunity to essentially refinance what they were behind on and consolidate it into one payment and reinstate their loan without facing foreclosure. That doesn’t mean someone under Chapter 13 can modify the terms of a residential mortgage as that is usually not possible because of language in the Bankruptcy Code that exempts residential mortgages from modification in bankruptcy; all it does is consolidate the payments they are behind on and lets them keep their homes going forward.
What is Lien Stripping?
Lien stripping refers to a practice that happens when someone files for bankruptcy and has a second mortgage on their house. If there is absolutely no equity in a second mortgage, then under the bankruptcy code in a chapter 13, that lien can be stripped away from the property. For example, if they bought a house with a $300,000 first mortgage, then took out a second mortgage for $50,000, and during the recession their home’s value dropped to $250, 000, when they file a Chapter 13 bankruptcy, they would be able to strip away the $50,000 second mortgage because the house is worth less than what is owed on the first mortgage. In other words, if you sold the house, the second mortgage would not get a dime since there was only enough money to pay most of the first mortgage off. So in a chapter 13, the second mortgage can be stripped away and turned it into an unsecured debt since there is no equity in the second mortgage. That means, at the end of the Chapter 13 plan, the grantor of the second trustee or the second mortgage would be requiredto release their lien on the property.
In terms of what happens procedurally, the person would have an appraisal done, and they would have to file a motion with the court. If the second lien holder objects and claims their lien cannot be stripped because there was equity and they can prove it, they could keep the lien on even if only $1 of equity could be found in the second mortgage. This is why you have to be very careful when you make a decision to use chapter 13 to try to strip a second mortgage away from your home.
Is It Possible To Purchase A House After Going Through Bankruptcy?
Once someone has been discharged from their Chapter 13, which means completing their plan, or they were discharged in a Chapter 7, within a couple years, they would be able to build their credit and possibly get a mortgage.
The biggest problem many people have is that once they complete their bankruptcy, they do absolutely nothing to re-establish their credit. Then they wonder why they cannot get credit within a couple years. Those who are proactive and take advantage of the opportunities available to them tend to do quite well and end up owning houses two years after they are finished with their bankruptcy.
For more information on Chapter 13 And Home Foreclosure, a free initial consultation is your best next step. Get the information and legal answers you’re seeking by calling (858) 278-2800 today.