How Chapter 13 Can Provide Relief From Foreclosures

If you are overwhelmed by medical or credit card debt and are facing foreclosure, you are not alone. Unfortunately, there are many across the nation that are in the same situation. You may be considering what your debt relief options are. If you have a steady income, Chapter 13 bankruptcy is an option that can stop foreclosure, save your home and eliminate many other types of debt.

The Chapter 13 process

The relief from foreclosure begins as soon as the bankruptcy petition is filed. After it is filed, the automatic stay, which is a court order that prevents creditors from continuing their debt collection efforts, goes into effect. Because of this, mortgage lenders must pause the foreclosure process until they get the court's permission to continue it.

Chapter 13 bankruptcy works by consolidating your debts into a payment plan, which will be paid back in full or in part over a three to five-year period. Under the plan, you make a monthly payment, the amount of which is determined by the amount of your disposable income. As long as you continue to make payments, you get to keep your house without the threat of foreclosure.

Each month, you make one payment under the plan to the bankruptcy trustee-an individual who has been appointed by the court to divide up the monthly payments among your creditors. Each creditor is paid in order of priority. Under the bankruptcy laws, secured creditors, such as mortgages and car loans are paid first. Unsecured creditors, such as credit cards and medical bills, are paid last. As a result, many unsecured creditors are only paid partially (or not at all) under the payment plan.

Once you have made all required payments for the three to five-year period, you receive a discharge of most of your remaining debt, meaning that you are no longer under a legal obligation to repay it. As a result, most of your unsecured debt is wiped out.

Multiple mortgages

In addition to first mortgages, Chapter 13 can help those with more than one mortgage on their home if you are underwater-or owe more than your home is worth-on your subsequent mortgages. Under the bankruptcy laws, such mortgages are treated as unsecured creditors, meaning that they will be paid last, if at all. In practical terms, this means that your obligation to pay your subsequent mortgages will most likely be eliminated.

Bankruptcy is a complicated area of the law, with many exceptions and traps for the unwary. As a result, it is advisable to seek the counsel of an experienced bankruptcy attorney, to ensure that your best interests are protected throughout the process.