The most recent foreclosure report from Realtytrac indicates that foreclosures in the United States have hit record levels in 2010.  This is all the more astounding, given the self-imposed moratorium on foreclosure proceedings by several of the major home lenders due to discrepancies in documentation.  Home owners facing default on their mortgage face a daunting decision: whether to make the next mortgage payment or not.

Filing for bankruptcy can be an option for home owners caught in this dilemma. It may allow the debtor to stop foreclosure and eliminate enough debt so that he or she can afford to keep the home. It may also allow the debtor to avoid high interest second mortgage payments under the correct circumstances (sometimes referred to “lien stripping”). Finally, it may afford the debtor the opportunity to walk away from the home without the uncertainty of attempting a short sale or facing a foreclosure proceeding.

The type of bankruptcy (Chapter 7 or Chapter 13) can affect a debtors options. Under Chapter 7, the debtor does not have to make payments during the pendency of the bankruptcy case. However, at the time the case is closed or discharged, the debtor must have enough money to become current on the loan. Otherwise, the debtor may face a new foreclosure proceeding at the end of the bankruptcy. In the alternative, the debtor can simply abandon the home and at the same time discharge the mortgage, including any second mortgages.

In the debtor files for bankruptcy under a Chapter 13 repayment plan, the plan lets the debtor pay off the late payments, including late payments over the duration of the repayment plan. The benefit of filing for Chapter 13 bankruptcy, compared with Chapter 7, is that the debtor gets to keep their home and get current on the mortgage over the life of the plan, instead of being required to become current on the date of discharge.

Filing for Chapter 13 bankruptcy may also allow a debtor to “strip” or eliminate the payments on your second or third mortgage. When the value of the home is less than the outstanding balance of the first mortgage, the Bankruptcy Court may remove the lien created by the second mortgage, and effectively convert the second or third mortgage into unsecuritized debt. Unsecuritized debt takes last priority in the repayment plan, and often does not have to be paid back at all.

In conclusion, though the economy has shown signs of recovery, millions of homeowners still find themselves out of work and unable to make their monthly house payments. If a debtor is facing foreclosure, he or she should consider the benefits of filing for bankruptcy as an option in staving off a foreclosure proceeding. In many cases, the homeowner will be able to keep his or her home.