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Saving your house in bankruptcy

Many people in Rockland County view bankruptcy as, among other things, as a sure-fire way to lose their home to the bank that holds the mortgage. The reality is exactly the opposite. If a person is seriously delinquent on mortgage payments, a bankruptcy proceeding maybe the only way to prevent the mortgage holder from foreclosing on the mortgage and reclaiming the house.

Several provisions in the Bankruptcy Code must be used to achieve this result. First, the homeowner must decide to proceed under Chapter 13 by commencing what is called a "wage earner bankruptcy." Unlike Chapter 7, sometimes called a "straight bankruptcy," Chapter 13 allows the debtor to prepare a plan of reorganization which, if approved by the court, will provide time for the homeowner to renegotiate the terms of the mortgage. Chapter 13 also gives the homeowner time to bring all delinquent payments current.

This effect is achieved by the automatic stay. Under Sec. 362 of the Bankruptcy Code, the filing of a Chapter 13 automatically causes the issuance of an order to all creditors that stops - or "stays" in legal parlance - all creditors from proceeding with attempts to collect their debts. In the case of a real estate mortgage, the issuance of the stay stops all foreclosure proceedings. The debtor must file the plan for repaying all debts that have been disclosed not later than 14 days after filing the Chapter 13 petition. The plan will be reviewed by the bankruptcy trustee, the judge and all creditors.

The debtor can then negotiate with the holder of the home loan about bringing the delinquency current and making future payments. Because the term of such a loan often extends beyond the close of the bankruptcy proceeding, the home owner can offer a repayment plan that uses the original repayment schedule. When the bankruptcy proceeding is closed, the automatic stay is lifted, and the home loan creditor can re-start the foreclosure proceeding. Because most lenders would rather receive money than a foreclosure deed to the house, the debtor will have some leverage in negotiating new terms. Real estate transactions can be complex, and the services of an experienced bankruptcy attorney may be useful.

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