In Foreclosure? Chapter 13 Can Help Save Your Home.

Personal emergencies and other economic troubles have caused many people in New Jersey and nationwide to be in a position where they fall behind on their mortgages. An unexpected medical procedure, for example, can put a person tens of thousands of dollars in debt. If you are in such a situation, you may wonder what to do next. Fortunately, if you have a steady income, Chapter 13 can help stop foreclosure and eliminate other types of debt.

How Chapter 13 works

As soon as you file for Chapter 13 bankruptcy, foreclosure relief begins. At this time, the automatic stay becomes effective. The stay is a court order that prevents creditors from engaging in debt collection activities against you. For your mortgage lender, this means that they cannot continue their foreclosure efforts until they ask the court for permission to do so.

Once the stay is in effect, the bankruptcy process begins. In Chapter 13, your debts are consolidated into a monthly payment plan where your debts are paid off in full or partially over a three to five-year period. The amount of your monthly payment is kept affordable, as it is based on your disposable income. As long as payments are made each month, your lenders are prohibited from foreclosing on your home.

Instead of making the monthly payments to your creditors themselves, you make payments to a bankruptcy trustee who is appointed by the court. His role is to divide up each payment and disburse payments to your creditors by order of priority. In bankruptcy, your secured creditors such as your mortgage lender or car finance company receive the lion's share of each payment, as they are paid first. This ensures that you will be able to catch up on any missed payment.

On the other hand, unsecured debts, such as medical bills or credit cards are paid last or not at all, depending on how much is left over after paying the secured creditors.

Once the payment plan is up after three to five years, the bankruptcy court grants you a discharge of most of your remaining unsecured debt. This means that if your unsecured creditors were not fully repaid under the payment plan, you no longer have to pay the remaining balance. This allows you to emerge from bankruptcy with a fresh start financially.

Help with second mortgages

Bankruptcy can also help homeowners who are underwater (i.e. owe more money than the home is worth) on second or third mortgages in a process called lien stripping. In Chapter 13, second and third mortgages are treated as unsecured creditors, making them among the last to be paid, if they are paid at all. This means that your obligation to pay these mortgages will most likely be eliminated when the court grants you a discharge once bankruptcy has been completed.

Since bankruptcy is not for everyone, the decision to file for bankruptcy should not be made on a whim, but only after consulting with an experienced bankruptcy attorney. An attorney can review all of your debt relief options with you and recommend one that would fit your individual situation.