Home foreclosure occurs when a home owner stops making mortgage payments and the mortgage company has the house sold at auction to collect the mortgage debt. The process is a long one and the final step is the auction. Bankruptcy can stop the process immediately up to the time the house is sold. Either a Chapter 7 or a Chapter 13 will stop the foreclosure process but only Chapter 13 offers a long term solution to the problem through bankruptcy. Other solutions can be found in a Chapter 7 but an aggressive mortgage company can start the process back up in as little as a month. A Chapter 13 allows a debtor to get caught up over five years and as long as they are catching up, the mortgage company must go along with the Chapter 13 plan.
New Washington laws require a mortgage company to offer a meeting with a homeowner before starting the foreclosure. After the meeting, they must also offer the homeowner an opportunity to go to mediation. The homeowner must take advantage of an offer to have this meeting within 30 days and can do some themselves. A request for mediation must be through an attorney or certified housing consultant. After giving the homeowner a chance for a meeting and mediation, the mortgage company starts the foreclosure process by sending a notice of default. The final sale can not take place sooner than 240 days from the notice of default.
A homeowner can still pursue a mortgage modification while in bankruptcy. If the bankruptcy is active, the mortgage company will want their bankruptcy attorney to provide written consent that the modification can continue. There is nothing in bankruptcy law that forces a mortgage company to accept modification but by eliminating debt, the homeowner may qualify for a modification when they otherwise would not.
Recently second mortgage companies have not been foreclosing as much as they did in the past. This is because often there not enough equity in the home to pay the second mortgage through an auction. If the value of the house is less than the balance of the first mortgage, a debtor can strip the second mortgage from the home in a Chapter 13 (but not a Chapter 7). In some situations, a homeowner can file a Chapter 7, obtain a modification and make a deal with the second mortgage company to forgive part of the debt. However, bankruptcy will not relieve a homeowner from their obligation to pay a mortgage debt if they want to keep the house. A Chapter 13 allows them to catch up on the loan but all the payments must be caught up within five years if that’s what the mortgage company demands.