Orlando home foreclosures and Orlando bankruptcies have been the subject of a lot of news. As with many topics of widespread interest, misinformation and myths have sprouted regarding what a bankruptcy can do for homeowners going through a mortgage foreclosure. Today, a very distressed couple consulted with me regarding their foreclosure. Their home was scheduled for a foreclosure sale in Lake county for the following day. They believed that filing for bankruptcy would help them save their home from foreclosure, even though they could not afford to make a monthly mortgage payment.
It is true that filing for bankruptcy, either under chapter 7 , or under chapter 13 , immediately stops a foreclosure action. However, simply filing a bankruptcy does not eliminate all of the legal claims of the mortgage lender, who is entitled to repossess the house if the homeowner defaults on the mortgage loan.
Homeowners can keep their mortgaged homes in a chapter 7 bankruptcy. However, when a homeowner is in default on their mortgage loan and they are behind on their monthly payments, chapter 7 bankruptcy will only delay the foreclosure. That is because chapter 7 does not allow a debtor to cure a default in the loan. The essence of a chapter 7 bankruptcy is the surrender of the debtor’s non-exempt assets in exchange for an immediate discharge from debt. In Florida, the homeowner’s equity in their homestead (the difference between the fair market value of the home, and the amount of debt owed on it), is exempt from the liquidation process, and the homeowner is therefore not required to surrender this asset. But the debtor cannot be in default if they intend to keep the house, either by reaffirming the mortgage debt, or by continuing timely payments on the mortgage (known as “retain and pay”). The best that a chapter 7 bankruptcy can offer to a homeowner in default is to delay the foreclosure process. The bankruptcy halts the foreclosure process until the mortgage lender receives permission from the bankruptcy court . Depending on how quickly the mortgage lender moves, this can delay the foreclosure by a couple of months, possibly longer. This temporary protection can give a family time to make arrangements to find another place to live.
Chapter 13 bankruptcy is better suited to helping a homeowner permanently save a home from foreclosure. Unlike a chapter 7 bankrutpcy, the chapter 13 bankruptcy allows the homeowner to cure a default and present a plan for catching up on the unpaid monthly payments (“the arrearage”). Such a plan requires the homeowner to make timely mortgage payments, plus an additional amount to pay the arrearage. The plan usually lasts a period of three to five years, depending on how much income the debtor has, and how much time is needed to pay the arrearage. Chapter 13 is an excellent method of saving a home from foreclosure, but only if the homeowner has steady income that is sufficient to provide for these monthly payments. The unfortunate homeowners who met with me today were battling unemployment and underemployment, and they did not have enough monthly income to present a plan for bringing their mortgage up-to-date. So, the bad news was that filing bankruptcy, either chapter 7, or chapter 13, would not help them keep their home.
Homeowners do have options for saving their homes, either on a temporary or permanent basis. I offer free consultations to Orlando area homeowners who want to explore their options for responding to foreclosure.