Foreclosure and Bankruptcy: Should You File Bankruptcy to Avoid Foreclosure? The Pros & Cons
As home foreclosures continue to soar, more and more homeowners are taking drastic measures to stay in their home. One of these is bankruptcy. Here, we outline some pros and cons of filing bankruptcy to avoid foreclosure.
Will Filing Bankruptcy Prevent Foreclosure?
The answer to this question is yes . . . and no. The explanation is that yes, it will stop the foreclosure . . . in the short term. But, you may still lose your home to foreclosure in the long run. Why/how?
In order to understand this, we must examine what happens when you file bankruptcy in hopes of preventing foreclosure.
Filing Bankruptcy to Stop Foreclosure: Chapter & and Chapter 13 Explained Process
There are two types of bankruptcy most individuals file to prevent foreclosure . . . Chapter 7 and Chapter 13.
Chapter 7 is where a petitioner (you) ask the court to discharge some or all of your debts.
Chapter 13 is where you seek a repayment plan with the courts to pay back your debts over a specified time period.
Which one you file will depend on your debts, your assets, your ability to repay/not repay, the state you live in and a host of other factors. The best course of action is to consult a reputable, qualified bankruptcy attorney – in your jurisdiction – to help you determine which type of bankruptcy is right for you.
Learn more about Chapter 7 and Chapter 13 in the video at the end of this post.
Filing Bankruptcy to Stop Foreclosure: The Process
When you file for bankruptcy, an automatic stay is put into effect. What this means is that it stops your creditors from being able to collect from you – for the moment at least.
In order to get around this “stay,” a creditor would have to get the bankruptcy court to lift it. In essence, all creditors named in your petition have to come through the bankruptcy court to take action against you.
This is one of those things that can actually be a pro and a con of filing bankruptcy – particularly if you are trying to stop the foreclosure process. Why is this? Quite frankly, when you file bankruptcy, you give up control of your financial situation. Now, a third party – albeit a party you brought into the mix – gets to decide how it all shakes out.
Nowadays, many creditors are willing to work with you, so you might be better off contacting them directly. This is particularly true of mortgage providers.
How You Can Still Lose Your Home to Foreclosure Even If You File for Bankruptcy
As mentioned above, when you file bankruptcy, the automatic stay put into effect will stop your creditors from taking actions to collect from you. This includes your mortgage holder. But, maybe not for long.
Consider this: Let’s say your house is about to be sold on the steps of the courthouse in one of those “foreclosure fire sales.” So, you rush to file bankruptcy to prevent the sale from going through.
What the mortgage holder (creditor) will do then is ask the court to lift the stay. If you really can’t afford the home, ie – you can’t pay the accumulate arrears on your mortgage, you haven’t built up any equity in the house and your finances prove that you can’t realistically afford the monthly payment – then the bankruptcy court will likely lift the stay and allow the mortgage holder to proceed with selling your home.
The reason is, creditors have every right to sell any assets you have in order to collect on the debt owed to them. And in this case, it happens to be your home.
Stopping Foreclosure: The Biggest Mistake Most Homeowners Make
Especially nowadays, there are many options available for homeowners to prevent foreclosure. One of the biggest mistakes many make is waiting too long to contact their mortgage company. Even if you file bankruptcy with the hope of stopping foreclosure, you are still going to have to work something out with your mortgage company – a payment plan that is acceptable to them.
As they hold the note, they have the right to approve or reject a plan. But remember, as we discussed in this post on stopping foreclosure – banks don’t want your home. They want a mortgage-paying homeowner to occupy it because it costs them money when they have to foreclose — in maintenance, HOA fees, repairs, legal fees, etc.
The bottom line on filing bankruptcy to prevent foreclosure is this: if your financial situation is temporary and you just need some time to reorganize to get back on track, you probably don’t need to file bankruptcy to do it.
Stopping Foreclosure via Bankruptcy: Some Pros and Cons
Pro: Stops the foreclosure process (at least in the short term).
Pro: Gives you breathing room to possibly reorganize finances.
Pro: Buys you a little more time to figure out how to hang onto your home.
Pro: Buys you more time to save money to pay off other debts, even if you eventually lose home to foreclosure.
Con: Ruins your credit; it will stay on your credit report for 10 years.
Con: You may still lose your home to foreclosure.
Con: You lose the ability to negotiate with your creditors. Though many will think of this as a pro, in today’s market, it really isn’t. As mentioned several times in this article, there are many solutions to stop foreclosure available to homeowners these days.
Again, consult a qualified bankruptcy attorney in your jurisdiction to decide the best course of action.
See Timeline For Foreclosure In All 50 States.
Get info on 32 ways to stop foreclosure: Discover what banks won’t tell you & investors don’t want you to know.
P.S.: Buy cheap foreclosures and have a $45/month mortgage — really!
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Learn the difference between a Chapter 7 and a Chapter 13 bankruptcy in the video below.
Copyright © 2009 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.