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Chapter 13 bankruptcy more effective against foreclosure

Arizona homeowners and those struggling with mortgage payments might be interested in the power bankruptcy can have in protecting a home from foreclosure. According to a study by the Center for Community Capital at the University of North Carolina, lower-income debtors who filed for bankruptcy following the initiation of a foreclosure action were 70 percent less likely to see their homes sold at foreclosure auction.

When an individual files for bankruptcy under either Chapter 7 or Chapter 13, an automatic stay is placed on all debt collection actions, including foreclosure actions, in which that person is the debtor. The study revealed that Chapter 13 was five times more effective than Chapter 7 in helping petitioners keep their homes in the long run. The authors of the study said Chapter 13's mechanism for reorganizing and repaying debts with manageable payments may account for the difference in the rate of home retention.

A Chapter 13 bankruptcy plan may require monthly payments for up to five years. Chapter 7 may be faster and offers its own unique advantages related to delaying foreclosure. Chapter 7 typically eliminates medical and credit card debt, for example, freeing up money that can be put toward mortgage arrears and payments. A bankruptcy attorney may be able to help debtors understand the benefits and limitations of the different types of filings; it may be possible to reduce or eliminate debts while retaining ownership of important assets.

The study examined 4,300 borrowers who had been 90 days or more behind on mortgage payments and against whom a foreclosure action had been initiated between 2003 and 2012. It revealed that only 8 percent of low-income borrowers took advantage of bankruptcy protection when they were foreclosed upon. The authors thought it was surprising, and said it may be the result of social stigma surrounding bankruptcy.

Source: MortgageLoan.com, "Study: Bankruptcy a Big Help in Saving Home from Foreclosure", Peter King, May 27, 2014

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  • MCBA | Maricopa County Bar Association
  • State Bar of Arizona
  • ABA | American bar Association | Defending Liberty Pursuing Justice
  • Oregon State bar
  • NACBA | National Association of Consumer Bankruptcy Attorneys
  • NACA | National Association of Consumer Advocates
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