Bankruptcy or Foreclosure?

If you’ve fallen behind on your mortgage payments, you might be worried about foreclosure. You might also wonder if filing for bankruptcy can help you avoid foreclosure.

Both bankruptcy and foreclosure can have a huge effect on your financial future. This article explains some of the advantages and disadvantages of each option. While this article has valuable information, you should speak to a qualified bankruptcy attorney to get the best legal advice for handling your mortgage debt.

What Is Foreclosure?

Foreclosure occurs when you miss payments on your mortgaged property, which is then repossessed.

To better understand foreclosure, you must understand secured and unsecured debts. Unsecured debts occur when a lender gives you money without requiring any collateral for the loan. Credit card debt is an example of unsecured debt.

Secured debts are secured by a specific piece of property that serves as collateral for the loan. When a borrower has too many missed payments, the lender can take back the property in foreclosure.

Mortgage loans are secured loans. When you don’t pay the mortgage on time, your mortgage lender can begin the foreclosure process. Foreclosure lets the mortgage lender take back a house or other real estate to recover some of the money they lent. The foreclosure process usually ends with the mortgage lender selling your home at an auction.

How Can Bankruptcy Help Me Stop Foreclosure?

Bankruptcy may help you avoid foreclosure. The federal bankruptcy code contains two primary types of bankruptcies for individuals: Chapter 7 and Chapter 13.

A Chapter 7 bankruptcy wipes out your debt. However, it does this by selling your property and using the money to pay your creditors. But both federal and state law allow you to declare some property exempt. Exempt property cannot be sold to cover your debts.

All jurisdictions allow people to exempt part of the equity in their homes. But beware: exemptions have limits. If you don’t have much equity in your home, you can probably keep it even in a Chapter 7 filing. But if the equity in your home exceeds the exemption limit, you could still lose your home in a Chapter 7 bankruptcy. However, Chapter 7 could still help you remove a second or third mortgage on your home.

Because of the limits of Chapter 7, most people facing foreclosure file Chapter 13 bankruptcies. Unlike Chapter 7, Chapter 13 doesn’t require selling your property. Instead, the Chapter 13 bankruptcy process helps you reorganize your finances and develop a repayment plan.

Most people facing foreclosure use the Chapter 13 plan to pay off their missed mortgage payments (also called arrearages). If you comply with the Chapter 13 payment plan terms, you should be able to keep your home. Note that you must pay the arrearages and current payments to keep your home.

Chapter 7 and Chapter 13 provide very different options for protecting your home. So, if you file for bankruptcy, choose the type of bankruptcy carefully.

Bankruptcy’s Automatic Stay and Foreclosure

Filing bankruptcy can also buy you time during foreclosure proceedings. When you file either a Chapter 7 or Chapter 13 bankruptcy petition, the court orders an automatic stay to any collection proceedings. This stay stops all debt collection actions and activities. This includes foreclosure sales. The stay will remain in place until the end of the bankruptcy case.

However, you should know that mortgage lenders usually ask the bankruptcy court to lift the automatic stay. If the motion is granted, the stay will be lifted, and the lender can proceed with the sale.

Questions To Ask Before Deciding Between Bankruptcy and Foreclosure

You have options and things that you should consider when choosing between foreclosure or bankruptcy:

• Have you looked at every alternative? Is your mortgage holder willing to change the terms of your mortgage? Talk to your lender because there may be options that help you avoid foreclosure or bankruptcy.
• Do you want to stay in your current home? If you don’t think you’ll be able to make your monthly payments for the foreseeable future and are willing to move, putting a lot of effort into keeping your home may not be your best option.
• Are you planning to buy another home soon? If you plan to buy another home in the next few years, waiting periods make foreclosure a poor option.
• Do you have other assets that you want to protect? Foreclosure, unlike bankruptcy, only affects your home. Even if your home is sold, you can keep your other assets. But if your mortgage is not your only financial issue, bankruptcy can help you with your other debts and give you a fresh start.
• How much do you owe on your home? If you’re “upside-down” in your mortgage (meaning you owe more than your home is worth), bankruptcy might be your best option to avoid a deficiency judgment.

Seeking Relief Through an Attorney

Sometimes bankruptcy is necessary. Bankruptcy can provide debt relief and allow you to live without the constant stress and worry your financial situation creates.

A capable attorney can help you survey the bankruptcy process and help you make decisions that will secure financial stability. If you, like many Americans, are facing tough economic times, consider hiring a lawyer in your area.