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Bankruptcy Remedies For Foreclosure

Bankruptcy affords two broad remedies to foreclosure by: (1) discharging mortgage deficiencies; or (2) restructuring mortgage debt.

Chapter 7 bankruptcy permits a debtor to discharge certain debts. If a property is lost through foreclosure, any resulting mortgage deficiency can be discharged in Chapter 7. In the alternative, in most cases a property which is homesteaded may be retained in Chapter 7 so long as the mortgage payments are kept current and the debt is reaffirmed. In this scenario, Chapter 7 also discharges unsecured debt, such as credit cards, thus freeing up funds to keep the mortgage payments current.

Chapter 13 bankruptcy allows a debtor to restructure debt through a monthly payment plan which lasts from 3 to 5 years. In the Plan, monthly mortgage payments are resumed and any mortgage arrears are cured over the life of the Plan. Also, a debtor can now attempt a mortgage modification in Chapter 13. In certain instances, a second mortgage can be “stripped” so that it is treated as unsecured debt in the Plan with the remaining balance discharged at the completion of the Plan. Lastly, the filing of a Chapter 7 will temporarily stop a foreclosure action or foreclosure sale, and a successful Chapter 13 filing will halt the foreclosure altogether.