Bankruptcy and the Arizona Foreclosure Crisis

How filing for bankruptcy could save your home from foreclosure

In 2009 and 2010, Arizona had the second highest rates of foreclosure in the country, with more than 300,000 foreclosures over those two years. Being buried in debt is difficult, but receiving the notice of foreclosure might feel like the nail in the coffin. However, it doesn’t have to be that way.

Although there are no guarantees, filing for bankruptcy during a foreclosure is a great way to halt and even save your home from foreclosure. Here are important facts to know about bankruptcies and foreclosures.

The Definition of Foreclosure

The official definition of foreclosure is the process in which an owner’s right to property is discontinued because of late or no payments. A foreclosure takes a while to finish, which gives an owner the chance to find alternatives. Depending on your situation, bankruptcy might be a viable option.

Chapter 7 Bankruptcy and Foreclosures

Chapter 7 bankruptcy is a good option to save your house if you don’t have a lot equity in it. Equity is the difference between how much money your home is worth and how much you owe on it. According to Arizona statutes, if you don’t have more than $150,000 in equity on your house, it is protected under the homestead exemption.

For example, if the market value of your home is $400,000 and you owe $300,000 on the house, there’s $100,000 in equity, which is below the exemption amount. This essentially means your house will be considered exempt property if a trustee is assigned to take and sell properties.

Although the court will usually grant an “automatic stay,” which temporarily prevents creditors and your lender from pursuing debt, you should still pay your mortgage to ensure saving your house.

Nevertheless, if your house is $400,000, but you only owe $150,000, there is $250,000 in equity. Since it’s above the exemption amount, a trustee can take your home and sell it to pay your debts after the stay is lifted.

When Chapter 13 Bankruptcy Is Better

When your house isn’t protected under the homestead exemption, Chapter 13 is the better option if you qualify. Filing for Chapter 13 doesn’t mean your debt is forgiven and your house is safe, however. The results vary for each individual, but a trustee establishes a repayment plan that allows you to repay debt and catch up on mortgage payments over a few years.

The only way this works is if you have a steady income and you’re confident you can make every payment until your debt is paid off. If not, you’ll most likely lose your home.

Chapter 13 might also be a better option if you have a 2nd and 3rd mortgage on your house. The Chapter 13 court could “strip off” and recategorize your other mortgages as unsecured debt if you don’t have enough equity to secure other mortgages.

Remember, not all people qualify for Chapter 13, since you need to be in a position to propose and complete a thorough repayment plan, but if you do qualify, it’s a great way to save your house from foreclosure.