Bankruptcy To Stop Foreclosure - Don't Rush In Without Knowing All The Facts
A few posts back I wrote about whether or not bankruptcy would save a homeowner from foreclosure. While declaring bankruptcy will stop the foreclosure sale, it is usually only a temporary fix.
Homeowners who declare bankruptcy to stop foreclosure enter into what is known as a Chapter 13. Basically, the homeowner (debtor) will submit a plan to the Court that will show how they plan to pay back their creditors all of the money they owe, within a 60 month period. The court takes the total owed and comes up with a monthly fee that the debtor is responsible of paying to their plan's Trustee. The trustee distributes that monthly payment to the various creditors.
What many homeowners don't fully appreciate, and just one of the many reasons that the bankruptcy system is fundamentally flawed, is that while they have a new monthly payment that they are required to make to the Trustee, they are still responsible for the financial obligations they had prior to their declaring bankruptcy (i.e. mortgage, student loan, car payment, etc). Homeowners that were about to lose their home in a foreclosure, now have to find a way to make a new monthly payment along with the original mortgage payment THEY COULD NOT MAKE.
Take a look at this Chapter 13 plan (PDF) which shows that a homeowner who declared bankruptcy to stave off a foreclosure sale now has to make a $1,094 payment for 60 months along with a $2676.86 mortgage payment each month. That means that this homeowner needs to have an income that will support paying $45,240+ a year for the next 5 years (not including living expenses (food, water, utilities, etc.).
What happens if the payments are not made in full? The person is discharged from their Chapter 13 plan, which means the foreclosure sale is back on, they cannot declare bankruptcy again to stop the foreclosure. If the homeowner does lose their home in a foreclosure sale at this point, their credit will be destroyed since they will have a bankruptcy as well as a foreclosure on their record.
While it may not be what a homeowner wants to admit, bankruptcy is a temporary solution to a huge problem. If you are in this situation, learn everything you can before you make a rush decision.
