Saving real estate through bankruptcy

Many real estate owners are confronting the worst housing market in decades. Foreclosures and loan defaults are at an all-time high and refinancing is difficult even for creditworthy homeowners. As a result, bankruptcy has become the favorable choice for many property owners facing foreclosure. Here are some of the ways bankruptcy can help:

1. The filing of a bankruptcy petition stops a foreclosure dead in its tracks: The “automatic stay” provision of the bankruptcy code will temporally stop all litigation and any attempt to collect a debt the moment the bankruptcy case is filed with the court. In fact, filing a bankruptcy petition can immediately stop a foreclosure sale. A federal bankruptcy case filing trumps many state rights of creditors to proceed against a debtor, with few exceptions.
2. A bankruptcy case can serve to cure a default and reinstate a mortgage: Most property owners that have fallen behind on mortgage payments have few remedies available to them that do not include either the full payment of their mortgage arrears in one lump-sum or redemption of the property through payment of the entire balance due to the lender. But in this credit-tight market, these options are rarely available. For that reason, a Chapter 11 Bankruptcy or chapter 13 bankruptcy case is often the only solution available to save real estate. These cases enable a property owner to cure a mortgage default by repaying the mortgage arrears through a monthly payment plan. Once the property owner completes the plan, the mortgage is reinstated and the default is cured.
3. Some mortgages can be eliminated or modified in bankruptcy: The bankruptcy code permits a debtor to modify the terms of a mortgage if the property is worth less than the amount due to the lender. A second mortgage on a residence and any mortgage on any other property may be modified or reduced. In some instances, if the first mortgage exceeds the value of the property, a second mortgagee can convert the lien from secured to unsecured status. The second mortgage holder then is treated as a general creditor with no rights against the real estate. This bankruptcy procedure has become a powerful tool for homeowners with no equity in their homes. Relieving homeowners of the burden of paying a second mortgage often provides the additional income needed to save the home.

Thus, bankruptcy can serve as a tool for a homeowner to level the playing field against big banks and assist individuals to get back on the road to financial stability.