Can You Stop Foreclosure by Declaring Bankruptcy?

Home ownership is part of the American dream, but it has been shattered for many people who have been unable to stop foreclosure in today’s struggling economy. What many people may not realize is that even after defaulting on a mortgage through late and missing payments, there are options for preventing foreclosure. Some of those alternatives do more damage to a person’s credit score than others. In fact, for those who have reached the end of their financial rope, the only alternative to foreclosure may be bankruptcy.

Foreclosure Alternatives

A homeowner may explore a number of options to stop foreclosure. Some are best examined when a debtor first realizes they are financial trouble. Others are a last effort to save their homes from default and foreclosure:

• Forbearance, by negotiating with the lender to allow some late or missed payments which will be made up at the end of the loan

• Loan modification, by negotiating with the lender to adjust the terms of the loan to more manageable interest rates or payment schedules

• Reinstatement, by informing the lender that a large payment will be received shortly, catching up the arrearages and getting the loan back on track

• Short sale, by which the homeowner attempts to sell their home, finally obtaining a written agreement from their lender to accept a sale price which is “short” of the mortgage amount as payment in full

• Deed in lieu of foreclosure, by which the lender agrees in writing to accept the deed to the home as full satisfaction for the remaining mortgage debt, even if it is less than the amount owed

Some of these are drastic steps that most homeowners would prefer not to take. For them, bankruptcy may be a more appropriate solution. Bankruptcy always begins with an automatic stay, or hold, on all debt collection actions for the duration of the bankruptcy process, stopping foreclosure, at least temporarily. There are two forms of bankruptcy that most individuals or families generally choose:

• Chapter 7 – also known as liquidation bankruptcy. It may require the homeowner to liquidate some of their non-exempt personal property, but most or all of their unsecured debt may be discharged, or erased. This is a good option for those with little property or equity in the property they own.

• Chapter 13 – also known as reorganization bankruptcy. It requires the homeowner to have enough disposable income to pay many of their debts under a new court-approved repayment plan that they propose. The repayment plan may last three or five years, but at the end, much of the filer’s remaining unsecured debt may be discharged. This is a good plan for those who have considerable property they wish to protect from liquidation.

Under both of these bankruptcy chapters, secured debts may be discharged, but any liens on those debts cannot be. In order to protect their home or car from foreclosure or repossession, they must be able to use their remaining finances to continue making payments or lose their property.

Getting Legal Help with Stopping Foreclosure through Bankruptcy                                   

Bankruptcy is a difficult step that causes financial and credit difficulties for years to come. However, it may protect a home from foreclosure, as long as the debtor chooses their options carefully and follows all the required procedures. Because of the complexity of these options, a debtor would be wise to consult a bankruptcy attorney to ensure the process provides the expected debt relief.