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How can bankruptcy protect my home from foreclosure?

On Behalf of | Aug 2, 2022 | Bankruptcy |

A Chicago-area family that is in the middle of a financial crisis, such as a job loss or medical emergency, will likely fall behind on some of their bills. They may have to miss or pay mortgage payments late because the alternative is to go without necessities.

Of course, banks and other lenders do not have unlimited patience for this.  They may start the foreclosure process to take back and sell the family’s home.

While there are other ways a family can hold off a bank from taking their home, the family may have to look to bankruptcy protection as an option.

The automatic stay can buy a family valuable time

After the filing of either a Chapter 7 or Chapter 13 bankruptcy the court issues what is called an automatic stay. Once the court does so, then a mortgage lender may not continue with its collection efforts until it gets permission to do so, or until the bankruptcy ends.

The automatic stay buys an Illinois family valuable time to re-arrange their finances and, possibly, negotiate with the bank. At a minimum, it can at least give the family additional time to find a suitable place to live.

Chapter 13 bankruptcy can provide long-term relief

However, the family should be aware that a Chapter 7 bankruptcy can only do so much when it comes to overdue mortgage debt.

A successful Chapter 7 can discharge other debts and provide garnishment relief, which could free up a family’s finances so they could work out a solution with their lender.

Chapter 7 also prevents the lender from pursuing the borrower for any balance owed after the home gets sold. However, in the longer term, a Chapter 7 does not stop a foreclosure.

On the other hand, a Chapter 13 repayment plan can include both the regular monthly house payment as well as catch-up payments. If the court approves the plan and the borrower completes it, then the borrower should be able to keep their home.