How does bankruptcy stop home foreclosure?

Part 1 of a three part series – What is Foreclosure?

Welcome to Part 1 in a 3 part series on how bankruptcy can stop home foreclosure.  In order to understand how filing a bankruptcy can stop a foreclosure and can help a distressed homeowner save his or her house, its important to understand what foreclosure is.  When you borrow money from any lender to purchase a home, land or any kind of real property, or if you refinance an existing loan, whether it’s a bank, finance company, or credit union, you will sign many documents.  The two most important documents are 1) a “Note” or Promissory Note as its sometimes called and 2) a Mortgage or Deed in Trust.

First, the Note is a legally binding contract in which the lender promises to loan you money and, in return, you promise to repay the loan over a specific period of time.  If you do not make the monthly payments listed in the Note, you are said to be in “default” on the Note.

Next, the Mortgage or Deed in Trust is a legally binding contract wherein the borrower gives the lender the right to sell the property if the borrower is in default on the note.  By this Mortgage, the property becomes what we call “Collateral”.   The process that the lender uses to obtain legal authority to sell the collateral is the Foreclosure process.

The Foreclosure process is a highly regulated.  Every state has laws that control when, where and how the foreclosure process takes place.     Those laws vary widely, but all states will make specific rules and impose restrictions on a lender who wants to take the property.   Some states require the lender to go to court first, others, like Michigan, do not require any court proceedings.   Many states require the lender to notify the debtor that they intend on starting the foreclosure process and requires that the lender give certain information to the debtor to advise them of their rights, and inform the debtor of alternatives to foreclosure and the ways that the debtor can repay the debt and keep the home.

Some of these alternatives to foreclosure include, refinancing the loan with another lender, asking the current lender for a loan modification to lower the payment, selling the property to an unrelated buyer, and if the offers to purchase the home are too low to pay off the debt in full, negotiating a “Short Sale” with the lender, whereby the lender accepts less than the payoff balance on the loan.  Finally, another to alternative to foreclosure is to offer to give the property to the lender without going through the foreclosure process; this is called a “Deed in Lieu”.

If possible, you should first attempt these alternatives, before proceeding to bankruptcy.   If your lender denies these options, then bankruptcy can provide the answer.  But, how does bankruptcy do this?  In Part Two, I will discuss how filing for bankruptcy can help you.

It is important to get the expert help that you need from the attorneys at Resnick & Moss, P.C. to help you make the right choices and achieve the best outcomes.   If you think that you may be facing foreclosure, or you have more than one mortgage on your home and cannot make your payments, please do not hesitate to call, Resnick & Moss, P.C.  (248) 642-5400 for a free telephone consultation or use our contact form to get in touch.