A major concern when filing for bankruptcy is what will happen to property that you own. Many homeowners fear the possibility of losing their home, but Chapter 11 bankruptcy can give you some much needed hope about keeping your home. Here's what you should know about how using Chapter 11 bankruptcy can affect any real estate you own.
How Chapter 11 Is Unique From Other Types of Bankruptcy?
A couple big differences with Chapter 11 bankruptcy cause it to stand out from other bankruptcy types that are available. The crucial difference with Chapter 11 is how you will receive an automatic stay during the petition filing process. The creditors that you owe money to won't be able to use bank levies, repossession, or wage garnishment to get the money that you owe during the filing period. They are not even allowed to contact you about the debts you owe. This allows you to get ready for a bankruptcy filing without the hassle of creditors bothering you
Chapter 11 will give you a 4-month period to get finances in order for bankruptcy, but the timeline could be extended to 18 months by a judge. Having this long period of time with an automatic stay gives you more time to stay in your home while you work out your finances. Your home is one of the more important and expensive assets that you have, so having this time is crucial.
Another advantage of Chapter 11 bankruptcy is that your unsecured debts will be discharged when it is over with. You can take the money that would have gone to pay those debts and put it towards your mortgage, which helps you keep up with mortgage payments as you are getting back on your feet financially.
How Chapter 11 Can Work With a Mortgage
Your home mortgage lender will want you to pay back the loan, and they will be willing to find an alternative solution that will help you keep up with payments. Solutions may include adding more time to the length of the loan or decreasing the amount of interest that you will pay over the years. Your lender doesn't want a borrower to give up on paying back the loan, and it is common for these types of offers to be made so you can keep up with payments.
A judge could also help with your mortgage by deciding to reduce the principal on the home. This is an option if your home is suddenly worth much less money than the amount you bought it for. The logic behind a principal reduction is that a mortgage lender would only be able to get the lower value from the home if you defaulted on the mortgage. By lowering the principal, the lender would actually make more money on the loan since you will continue to pay interest on the remainder of the loan until you have paid it off.
For example, you may have purchased a home for $200,000 and have $175,000 left on the mortgage. If you discovered that the home is now worth $125,000 according to the real estate market, you could have the remainder of your loan reduced by $50,000 by a judge. The new loan amount will not take into consideration that amount that you already paid towards the mortgage, but simply lower the amount owed to the current market value of the home.
Dealing with Chapter 11 bankruptcy and a mortgage can be a complicated legal matter. Thankfully, you are not in it alone. William S. Orange III is an attorney that specializes in bankruptcy cases and can help you through the entire legal process.