For Illinois homeowners who are facing foreclosure, bankruptcy may be a powerful tool to stave off any action by a lender to take their home away. The best reason why bankruptcy may be useful is because an automatic stay of the foreclosure occurs when an individual decides to file. The type of bankruptcy that an individual files may provide different types of relief.
When an individual files for Chapter 13 bankruptcy, it may allow for the reorganization of past debts, which can be paid out over a period of time, from three to five years. If the plan is completed, the foreclosure may be lifted by the lender, and the owner can stay in his or her home. Those who have second or third mortgages may have that debt cancelled if it is reclassified as unsecured debt and given a low priority for repayment by the bankruptcy court.
Filing for Chapter 7 enables a debtor to cancel some or all of his or her debts. It may also be possible to have any tax liability due to a lender losing money on a default waived. However, it is important to understand that filing for Chapter 7 may still result in the loss of a home as it does nothing to reorganize past due debt. Therefore, the lender may still proceed with foreclosure after the bankruptcy is complete.
A bankruptcy may be a useful tool to stave off foreclosure as it may allow time to negotiate a new payment plan with a lender. Those who are seeking a loan modification may wish to talk to a bankruptcy attorney who may be able to act as a liaison between the client and the lender to create a plan that may allow the client to remain in the home.
Source: Findlaw, "Facing Foreclosure? How Bankruptcy Can Help", August 07, 2014