How Does Bankruptcy Protect My House?
Illinois is a judicial foreclosure state, which theoretically means that homeowners have more protections when they fall behind on payments. But homeowners shouldn’t count on this protection. The Prairie State has the highest foreclosure rate in the country.
Most banks can legally begin foreclosure proceedings after only one missed payment. These proceedings often begin with loan acceleration. The bank demands the entire amount and stops accepting partial payments. So, every month, homeowners fall further and further behind.
Homeowners cannot count on politicians to protect their homes, but that can count on a Chicago bankruptcy lawyer to protect their homes from foreclosure. As outlined below, an attorney stops current foreclosure proceedings, gives homeowners time to catch up on payments, and in most cases, makes their homes more affordable later down the road.
Civil judges usually only stop foreclosure proceedings if there is clear evidence of severe lender misconduct, like blatant fraud or a serious procedural irregularity. Such evidence is difficult to obtain, especially early in the litigation process.
But bankruptcy’s Automatic Stay is automatic. As soon as debtors file their voluntary petitions, and creditors receive notice of the proceeding, Section 362 of the Bankruptcy Code stops foreclosure and most other kidneys of creditor adverse action.
Creditors must have special permission from the judge to bypass the Automatic Stay. Convincing a bankruptcy judge to cancel the Stay is even harder than convincing a civil judge to block a foreclosure sale because of lender misconduct. Usually, judges only allow creditors to bypass the stay if the debtor threatened the collateral (e.g. I’m going to burn the house down).
The Automatic Stay lasts up to five years in a Chapter 13. This extended period gives homeowners plenty of time to choose an option like:
- Repayment: Each month, debtors pay a little bit on past-due mortgage payments and other allowed claims, like past-due auto loans and student loans. Because of the Automatic Stay, mortgage lenders cannot pressure debtors to repay their obligations faster.
- DIL: A deed in lieu of foreclosure is basically a voluntary foreclosure. The owners agree to leave the house and turn over the title to the bank. In return, the bank agrees to drop the foreclosure proceedings. A DIL looks much better on a credit report than a foreclosure.
- Short Sale: The owner sells the house to a buyer for less than the amount owed to the mortgage company, and the bank agrees to write off the delinquency. In many cases, there’s no difference between a sale and a short sale on a credit report.
A Chicago bankruptcy attorney helps in all three areas. Lawyers negotiate with trustees (people who oversee bankruptcies for judges) to obtain reasonable payment plans. Lawyers also negotiate with banks to obtain foreclosure relief, like a DIL or a short sale.
Attorneys can unlock advanced bankruptcy options, like a cram down or a strip off, that might save your family thousands of dollars a year.
Lien stripping might be the most common advanced option. Assume Tom used an 80/20 mortgage ($160,000 senior lien and $40,000 junior lien) to buy his $200,000 home. That home is now only worth $160,000.
Since the home’s value isn’t big enough to secure both debts, the judge could declare that the junior lien is a dischargeable unsecured debt. This reclassification means Tom doesn’t have to repay that debt and gets to keep his house.
Connect with a Thorough Cook County Lawyer
No matter what kind of financial problem you are having, a solution is usually available. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.