Individuals struggling with their finances often have to make difficult decisions. They may submit payment to one creditor at the expense of others because they do not have enough income to cover all of their financial obligations. In some cases, financial issues become so pressing that individuals fall behind on even their most important financial responsibilities.
People who have missed multiple mortgage payments are potentially at risk of foreclosure. The home where they live could be vulnerable to collection efforts initiated by the lender. Some people choose to file for Chapter 13 bankruptcy when they realize that they might be at risk of foreclosure.
How can Chapter 13 bankruptcy help people who have fallen behind on their mortgages?
Halting collection activity
A Chapter 13 bankruptcy is actually a multi-year process. Thankfully, people don’t have to finalize their bankruptcies to receive financial relief. The courts typically grant an automatic stay that goes into effect the same day that a filer submits paperwork to the courts. That stay prevents creditors from continuing their collection efforts. Even pending legal proceedings, including foreclosure, cannot proceed until the courts respond. In many cases, creditors and mortgage lenders dismiss pending lawsuits. Even if they want to proceed with collection efforts, they must file a petition and obtain court approval to continue.
Incentivizing modifications
The reason that Chapter 13 bankruptcy takes so long to complete is that the filer must create and carry out a repayment plan. They negotiate with creditors and the trustee appointed by the courts and then make monthly payments that help reduce what they owe their creditors. The process of negotiating a repayment plan provides an opportunity to communicate directly with creditors and modify existing financial obligations. Mortgage lenders may agree to make changes to a loan as part of a Chapter 13 bankruptcy case.
Reducing financial pressure
After successfully completing Chapter 13 bankruptcy proceedings, filers may still have many years of payments left on their mortgages. They can’t discharge the mortgage and keep the house. That being said, they may have a much easier time making their monthly payments after they discharge credit cards, medical debts and other sources of financial pressure. The elimination of unsecured debts can make it possible for people to remain up to date on mortgage obligations and other key financial responsibilities.
Reviewing financial circumstances with a skilled legal team can help people determine if a Chapter 13 bankruptcy might be the right choice for them. People facing foreclosure and aggressive collection efforts may find that Chapter 13 bankruptcy is an effective way of protecting their most valuable assets.
