Sunday, June 14, 2020

Bankruptcy and Home Foreclosure: What You Should Know

What are the links between personal bankruptcy and foreclosure? Is there any risk of losing your home if you file for bankruptcy? You may have heard that some forms of bankruptcy can actually prevent foreclosure in certain circumstances. Accordingly, you may be wondering, if I want to stop a foreclosure, which type of bankruptcy should I file? There are some significant ways in which consumer bankruptcy and home foreclosure are interrelated. If you are struggling with debt and own your home, it is important to gain a clear understanding of the potential ties between bankruptcy and foreclosure.

Chapter 13 Bankruptcy May be Able to Stop a Foreclosure and Allow a Consumer to Stay in the Home
One of the most significant tools in a Chapter 13 bankruptcy is the automatic stay because it can allow a homeowner who is behind on mortgage payments to stop a foreclosure. While the automatic stay applies in any bankruptcy case, it is particularly important for consumers in a Chapter 13 bankruptcy case who are at risk of losing a home to foreclosure.

As you may already know, Chapter 13 bankruptcy is a “reorganization” bankruptcy under the U.S. Bankruptcy Code. As such, when a debtor files for Chapter 13 bankruptcy, the automatic stay prevents creditors or collectors from taking any additional actions on existing debt (including mortgage debt), and the debtor has the opportunity to reorganize debts in a repayment plan. The terms of the repayment plan usually last three to five years, and that plan gives debtors an opportunity to get back on track with mortgage payments. To be clear, the automatic stay can stop the foreclosure, and the repayment plan allows the homeowner to get back on track with mortgage payments to keep the home.

Chapter 7 Bankruptcy Cannot Prevent a Foreclosure
While Chapter 13 bankruptcy can stop a foreclosure and can allow the debtor to remain in his or her home, it is important to understand that Chapter 7 does not have the same ability. Chapter 7 bankruptcy is a liquidation bankruptcy, which means that any non-exempt debt will need to be sold (or liquidated) to repay creditors. Once the bankruptcy process is complete, usually in a number of months, eligible debt will be discharged. Given how the Chapter 7 bankruptcy process works, it will not be possible to file for Chapter 7 bankruptcy and expect to avoid a foreclosure and then remain in the home.

Illinois Does Not Have a Significant Homestead Exemption in a Chapter 7 Bankruptcy Case
While the Illinois homestead exemption may not have a direct correlation with foreclosure, it is important to know that, if you file for Chapter 7 bankruptcy—even if you are not at risk of foreclosure—you may not be able to keep your home. While some states have much higher homestead exemptions, Illinois only has a $15,000 homestead exemption (or $30,000 for a married couple that files for bankruptcy together). A bankruptcy lawyer can discuss the implications with you if you currently own a home and are considering Chapter 7 bankruptcy.

Contact a Bankruptcy Lawyer in Oak Park
If you have questions about bankruptcy and foreclosure prevention, one of our experienced Oak Park bankruptcy attorneys can speak with you today about your case. Contact the Emerson Law Firm for more information.

See Related Blog Posts:
Benefits of Filing for Bankruptcy
Reasons Why Filing for Bankruptcy Sooner Could Benefit You in the Long Run


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