Nearly 50-percent of people fail out of bankruptcy within the first year. Many financial experts fault the new bankruptcy laws implemented in 2005. The Bankruptcy Abuse Prevention and Consumer Protection Act require all debtors to repay a portion of their debts through a chapter 13 repayment plan. In addition to normal monthly expenses, debtors must contribute a large percentage of disposable income toward their repayment plan.
When debtors fail out of bankruptcy, creditors included in chapter 13 repayment plans are allowed to petition the court and request the bankruptcy be dismissed. A judge can elect to allow the debtor to file chapter 7; which involves liquidating assets to repay creditors, or dismiss the case. If the judge dismisses bankruptcy, creditors can move forward with collection actions, including foreclosure.
When debtors file for bankruptcy, an 'automatic stay' goes into effect to protect the debtor from creditor actions. Creditors are forbidden from initiating or continuing lawsuits, collections, wage garnishment, repossession or foreclosure. The automatic stay protects debtors as long as they adhere to their repayment plan and continues until debts are repaid.
Today, many homeowners are filing bankruptcy to avoid foreclosure. Although this action can temporarily halt the foreclosure process, if the homeowner is unable to pay their regular mortgage payment and the additional chapter 13 payments, foreclosure is inevitable.
One important fact many people do not realize is when debtors fail out of bankruptcy, mortgage lenders can continue with the foreclosure process where they left off. For instance, if foreclosure was scheduled within two weeks and the debtor files bankruptcy, than later fails out of bankruptcy, the lender can potentially foreclose within two weeks.
I have witnessed homeowners lose their homes within three days after failing out of bankruptcy. While bankruptcy can be a saving grace, people who use this tactic to stop foreclosure need to understand the consequences if they are unable to adhere to their repayment plan.
If debtors find they cannot make their chapter 13 payments on time or in full, they should immediately contact their bankruptcy attorney. The attorney can contact the bankruptcy Trustee and attempt to work out a plan. If the debtor's financial setback is temporary, most creditors will work with the debtor to help them prevent failing out of bankruptcy.
Chapter 13 bankruptcy can offer debtors relief from debt. However, bankruptcy alternatives exist which can oftentimes offer the same relief without the severe financial ramifications. Bankruptcy can remain on your credit report for up to ten years. Bankruptcy alternatives such as debt consolidation or debt settlement will impact your credit history, but not nearly as severely as personal bankruptcy.
Prior to making a final decision to file for bankruptcy protection, take time to review all options available. Weigh the pros and cons of each option to determine which plan will provide the most benefit with the least impact.
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