Can bankruptcy save my home from foreclosure?

Under current bankruptcy laws, an individual or family may be able to stop foreclosure of their family home. Many families who are facing foreclosure find that either their mortgage company will not work with them to stop a foreclosure, or want a very large cash payment in order to modify their mortgages.

Many individuals and families are able to save their homes from foreclosure by filing a Chapter 13 bankruptcy, which is a debt reorganization under bankruptcy law. In most cases, filing Chapter 13 stops the foreclosure process, preventing eviction and giving the homeowner time to file a plan to reorganize debts. Without the looming threat of foreclosure and eviction, homeowners can work with their attorney to create a plan that allows them to affordably reorganize their debts and save their home.

Chapter 13 allows the homeowner to create a plan to repay the house payments that were missed prior to bankruptcy over three to five years. If the homeowner has fallen behind on property taxes, the property taxes can be paid over time in the Chapter 13 plan as well. Normally the homeowner makes one payment to a court appointed trustee, who pays debts included in the plan from the payment. After filing Chapter 13, the homeowner then resumes making the regular monthly payment on the home, while the arrears are paid to the mortgage company by the trustee.

Chapter 13 can make it easier for the homeowner to resume making their house payments by restructuring their other debt as well. Credit cards, medical debt, personal loans, and other unsecured debts are paid through the plan, but may not have to be paid in full, depending on the homeowner’s income and family size. Many chapter 13 filers pay only a small percentage on these debts with the balances being “discharged” or forgiven by the court when the plan is successfully completed. Some car loans can be restructured to reduce the balance of the loan to the value of the vehicle, and to reduce the interest rate.

A homeowner who is facing foreclosure may be able to use the protections of bankruptcy to allow them to catch up missed payments over a reasonable period of time, and protect the equity they have in their home.

Student Loans Are Burying Me. What Can I Do?

Many Americans have borrowed tens or even hundreds of thousands of dollars in student loans, only to find that the education they received has not helped them achieve an income level that allows them to pay their student loans. Many others pay their student loans but are unable to purchase homes, or new cars, or even dinners out, because their student loans are such a burden on their budget.

The numbers clearly show this burden is large and growing. In 2004, 66% of graduates of 4 year universities had student loan debts. The average debt was $19,200, which was a 108% increase from ten years earlier. For those with graduate degrees, the numbers are much higher, ranging from $32,858 for those receiving Master’s degrees, to over $125,000 for medical school graduates. For many people, student loans are a crippling financial burden.

Can bankruptcy help? The short answer is yes and no.

First the bad news, bankruptcy will almost certainly not discharge, or eliminate, student loans. In 1998, Congress changed the bankruptcy laws to make most student loans non-dischargeable, and in 2005 all other student loan were made non-dischargeable. There is an exception to the rule, but almost no one qualifies for the exception. In short, bankruptcy almost never wipes away student loans.

Where bankruptcy can help is to give an individual a break from student loan repayment and harassment from student loan collectors. If a borrower is in default on student loans, and receiving phone calls, threatening letters, being sued, or having their wages garnished for student loans, the automatic stay in a Chapter 13 bankruptcy can stop all of these collection tactics for the duration of the case. This allows the borrower time to “catch their breath” and reorganize their debts, without the burden of student loan collection efforts or wage garnishment.

While not eliminating student loans, a bankruptcy discharge may allow an individual to eliminate other debts, such as credit cards, medical bills, foreclosure or repossession deficiencies or personal loans, so that the individual can dedicate the money from these payments to pay their student loans.

There may be non-bankruptcy alternatives to eliminating student loans as well. Many Federal student loans can be cancelled by the U.S. Department of Education if the borrower dies or becomes totally and permanently disabled. In addition, under some circumstances a student loan may be cancelled if the school the borrower attended closed while the borrower was enrolled or soon thereafter, or if the school improperly certified the student’s ability to benefit from the training provided by the school.

Finally, state and Federal governments have several programs to forgive student loans of individuals in certain fields and professions, such as teaching, social work, medicine, and military service.