For many families in Westmoreland County, the first sign of serious financial distress can be getting behind on house payments.
Falling behind on a mortgage is scary, as most lenders will not hesitate to start foreclosure on a family home if they are not getting payments.
While there may be other solutions as well, a bankruptcy can in some ways help a family protect their home from foreclosure, particularly if they have fallen behind because of a financial crisis like an unexpected job loss or a medical emergency.
At a minimum, a Pennsylvania family can use a bankruptcy filing to stall a foreclosure because of the automatic stay.
After most bankruptcy filings, an automatic stay applies under federal law and prevents creditors, including mortgage lenders, from taking collection actions.
So long as the sale of the home at auction has not been completed, a lender will have to hold off on foreclosure until after the bankruptcy or until it gets permission from the bankruptcy court to proceed.
Chapter 7 bankruptcy offers limited protection from foreclosure
A family can use a Chapter 7 bankruptcy to help indirectly resolve a foreclosure. Chapter 7 bankruptcy is highly effective with respect to discharging other debts, like credit card debt, medical bills and debt incurred in connection with a business.
The process may free up enough income for a family to work out an arrangement with the lender to keep paying and catch up on their balance.
It is also important to note that after a Chapter 7 bankruptcy, a mortgage lender cannot pursue a debtor’s other assets, like his or her wages, for example.
However, Chapter 7 in of itself will not stop a bank from selling the home at a foreclosure auction after the bankruptcy concludes.
A Chapter 13 may be a better option for a family intent on saving their home
Instead, a family who wants to save their family home in the long term may consider filing a Chapter 13 bankruptcy provided that they expect to have a steady stream of income.
A Chapter 13 bankruptcy allows a debtor to submit a payment plan to the court for approval. If approved, a debtor may make ongoing mortgage payments and catch-up through the federally backed plan. The family can keep the home if they complete their payment plan successfully.