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What happens when you can’t avoid foreclosure?

Posted: June 21, 2011

By: Brad J. Davidzik
Attorney, Jeffrey Freedman Attorneys at Law

In my previous article I talked about what to expect if your home is foreclosed on.

Even though Western New York was not hit by the “housing crisis,” a number of homeowners here have lost their jobs, gone through a divorce, or have suffered a serious injury or illness and cannot keep up with their mortgage payments.

Homeowners facing foreclosure who work with their banks and come up with a satisfactory loan modification program can often avoid losing their homes and get back on their feet.

Those who have the ability to make future monthly mortgage payments but need more time to catch-up on missed payments, or who have other past-due bills such as medical or credit card payments that interfere with their ability to pay their mortgage, may choose to file a Chapter 13 bankruptcy.

This would “stay” the foreclosure lawsuit and give the homeowner a chance to bring the mortgage current.

A Chapter 13 bankruptcy allows you to reorganize your finances and possibly discharge a portion of your debts. Through the bankruptcy court you and the court-appointed trustee come to agreement on how much of your debt you will repay and what your monthly payments will be based on your income and your monthly living expenses. You will pay the total amount to the creditors’ trustee, who will disperse the funds to your creditors.

The benefit of Chapter 13 is that the balance on the principal of your mortgage doesn’t increase, whereas in a loan modification the mortgage lender adds the interest portion of your missed payments back into the loan balance.

This erodes the equity you may have had or, if you had no equity, puts your home loan “underwater.”

Also, in a Chapter 13 the entire amount paid on a credit card debt is applied to the principal, you no longer pay interest on your credit card debt.

This ends the struggle of trying to make monthly payments that at least cover the financing fee portion of the bill.

If you have lost your home and creditors are still pursuing you, a Chapter 7 bankruptcy may be the best option to put an end to the constant stress and financial burden. Similarly, if you are current on your mortgage or are only a month or two behind but feel your other bills are making it difficult to make that monthly payment, you may want to consider filing Chapter 7 bankruptcy to make a complete fresh start.

The mortgage foreclosure process in New York is lengthy and complex. If your financial problems are due solely to your monthly mortgage payment, active participation in the foreclosure proceeding may result in a satisfactory settlement.

If the mortgage is only part of your overall debt problem, however, you should explore further options for putting your financial house in order.

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