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Examining the relationship between bankruptcy and home mortgages

On Behalf of | Jan 14, 2015 | Bankruptcy

Virginia homeowners who are struggling with overwhelming debt may be interested in how home mortgages are affected during bankruptcy. When the borrower seeks to reorganize their debt, this has some repercussions on the ability of a lender to collect.

Chapter 13 bankruptcy is a type of personal bankruptcy where a borrower enters into a 3- to 5-year payment plan that is negotiated with various lenders. During the negotiation period and throughout the payment plan itself, there is an automatic stay on any collection actions by the lenders against the borrower. In the case of a home mortgage, any collection on back payments or other fees is stopped. Foreclosure on the home is also paused as long as the home has not yet been sold at auction.

If a homeowner has missed payments and is in danger of going into foreclosure, the government recommends that homeowners reach out to their lender and explain the situation. Because going into bankruptcy costs the lender money, they may be willing to work out a payment plan or other deal that will allow the homeowner to make up the payments and avoid bankruptcy. This requires a clear explanation of the reasons for the missed payments, and the action taken could vary depending on whether these issues are short or long term.

An attorney may be helpful in negotiating with the mortgage lender on behalf of the borrower. The attorney may also be able to fully assess the person’s financial situation and determine the best way to move forward with debt relief. This might include filing for Chapter 13 bankruptcy to reorganize debt into an affordable payment plan or some other method to pay off creditors.