Homeowners who can’t make their mortgage payment may eventually face foreclosure, but bankruptcy may help you get back on your feet financially. Bankruptcy can halt your foreclosure proceedings and give you an opportunity to save your home. If you have already been through foreclosure, bankruptcy may erase your remaining debts from the foreclosure proceedings.
Bankruptcy is governed by federal law, and most individuals file under Chapter 7 or Chapter 13. Under Chapter 7 bankruptcy, a debtor’s nonexempt assets are sold to pay his creditors. Both federal law and Alabama law provide a list of exempt property, including certain personal property. For example, under Alabama law, a debtor may keep up to $5,000 of his home's value, or equity. If an asset does not qualify for an exemption, it may be seized and sold, including the debtor’s home. Once the debtor files for bankruptcy, collection actions are automatically stayed – or stopped – so creditors cannot continue foreclosure proceedings.
Chapter 13 and Foreclosure
Under Chapter 13, the debtor uses his disposable income to make payments on his debts over a three to five year repayment plan. Like Chapter 7, Chapter 13 cases provide an automatic stay of collection actions. Many homeowners facing foreclosure choose to file under Chapter 13 rather than Chapter 7 because Chapter 13 halts the foreclosure process while allowing the debtor to catch up on past-due mortgage payments. Homeowners are often able to keep their homes and avoid foreclosure under Chapter 13.
Alabama allows mortgage lenders to obtain deficiency judgments, which make homeowners liable for the amount of money the lender does not recover from the foreclosure of a home. For example, if your home sells under foreclosure for $125,000 but you owed $130,000 on your mortgage, your lender could obtain a deficiency judgment for the remaining $5,000 plus costs and fees. You would have to pay this debt even though you no longer own the home.
Discharging Deficiency Judgments
Your mortgage is considered a secured debt, meaning the loan is secured by collateral (your home), but deficiency judgments are considered unsecured debts, meaning they are not secured by collateral. Most unsecured debts, including deficiency judgments, are eligible for discharge under either Chapter 7 or Chapter 13. A discharge is granted at the end of a bankruptcy case once the debtor has completed all the necessary steps, such as attending financial counseling. If granted, the discharge erases the debtor’s obligation to repay the debt. Thus, if your deficiency judgment is discharged, you no longer have to pay it.