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Can filing for Chapter 13 bankruptcy stop foreclosure?

Many homeowners in Mississippi have fallen behind on their mortgage payments and are now facing the possibility of losing their homes. Most lenders are unwilling to allow for a short sale or loan modification. Rather, they will begin the foreclosure process as soon as possible.

Once the foreclosure process is complete, the creditor will typically repossess the house, sell it at a public auction and use the proceeds to pay for the mortgage and legal costs. However, homeowners may be able to stop foreclosure by filing for Chapter 13 bankruptcy.

When filing bankruptcy under Chapter 13, the court will grant an automatic stay, which will stop creditors from attempting to collect debts. The foreclosure sale will be postponed until the bankruptcy is finalized.

The loan may then be reinstated and the debtor will develop a repayment plan to pay back their missed payments. Debtors may decide on an appropriate length of time in which to repay the arrearage keeping in mind that both past due and current mortgage payments must be paid at the same time. Debtors who abide by the repayment plan will be able to avoid foreclosure.

Chapter 13 allows a homeowner to pause action on the lien while they become current on their mortgage payments. However, if a debtor filed for bankruptcy in the past two years, Chapter 13 will not prevent foreclosure if the bankruptcy court lifted the automatic stay. Lenders may file a motion to lift the automatic stay and continue with the foreclosure sale, thereby depriving the homeowner of the three to four months of time typically required to finalize the bankruptcy before the house is foreclosed upon.

Chapter 13 may also assist homeowners with financial challenges pertaining to second or third mortgages. Second and third mortgages are typically recategorized by bankruptcy courts as unsecured debt. A homeowner whose first mortgage is secured by the entire value of their home are eligible for this recategorization because they have no remaining equity with which to secure the second and third mortgages. Homeowners benefit from these debts being recategorized as unsecured debts because they are then considered last priority and repayment is often not required.

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