Will a Chapter 7 bankruptcy help me with foreclosure?
Although a looming foreclosure may be a big reason why a family in the Detroit area considers a bankruptcy in the first place, the most common type of consumer bankruptcy, a Chapter 7, only offers limited assistance to families who are facing the loss of their home.
Chapter 7 bankruptcies do not in the long term prevent a bank from foreclosing on a home and selling it at an auction.
Like other holders of liens, the bank or mortgage company has the right to their collateral, that is, the house, even if the debtor receives a bankruptcy discharge.
A Chapter 7 filing can still be a useful option that a family may wish to consider.
For instance, the discharge will legally prevent the bank from trying to collect any outstanding balance on the debt once the house gets sold. Because many families in Michigan file bankruptcy when they are upside down with respect to their homes, having protection from garnishments and court proceedings is useful.
The Chapter 7 may also discharge other debt and stop other collection activity, which could in turn give the family an opportunity to work out a solution directly with the bank.
Finally, the Chapter 7 automatic stay will at least pause the foreclosure process for some time, possibly for several weeks.
Chapter 13 may be a better option for families wanting to save their homes
If it is an otherwise feasible option, a family may wish to consider filing a Chapter 13 bankruptcy if stopping a foreclosure is their goal.
With a successful Chapter 13, a family can agree to a payment plan that includes both their current mortgage payments as well as catch-up payments spread out over up to 5 years.
Since the Chapter 13 may also allow them to pay back nothing or only pennies on the dollar for their other debts, a family may be able to stay afloat financially as they fix their delinquent loan.