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Monday
Mar292010

How to prevent foreclosure - File for bankruptcy

Bankruptcy is a way for people to buy time and use a court administered process to either:

  1. discharge their debts (Chapter 7 Bankruptcy); or
  2. work out a plan to repay their debts over time (Chapter 13 Bankruptcy). 

The Bankruptcy Code can be found in Title 11 of the U.S. Code.  The Bankruptcy Code stops all collection efforts against the debtor, but only temporarily. 

In recent years, the bankruptcy laws have been revised, restricting the use of this legal remedy and making it more complex to undergo the process.  

Some homeowners may think that filing bankruptcy will save their property, however, what the process really does is buy some time until the matter can be sorted out.  If the bankruptcy process is completed (i.e., a judgement is entered), debts will either be discharged or restructured. The bankruptcy will appear on the homeowner’s credit report for ten years. 

Homeowners in foreclosure should obtain the counsel of an attorney specializing in this area of law to determine how they might benefit from the process, and with the assistance of the attorney, determine if they should file bankruptcy or not.

Things to consider are how your credit report will be affected by a bankruptcy compared to a foreclosure (foreclosure is generally viewed more negatively by credit agencies.)  Also, I am aware of instances where homeowners have used the process successfully to buy additional time in their home without actually completing the process. 

In the event the lender will not provide a time-extension, filing bankruptcy may provide the homeowner with the needed time to complete his/her negotiations with the lender or to complete a transaction with a buyer of the property.  These matters should be discussed with the attorney to gain a clear understanding of the homeowner’s circumstances, the desired outcomes, and the process that needs to be followed.  If the bankruptcy case is not properly handled by the homeowner and attorney (and even if it is), the homeowner should be aware that he or she may lose control over the decisions affecting their property. 

Chapter 7 vs. Chapter 13 Bankruptcy:

In Chapter 7, the foreclosure trustees are able to petition the bankruptcy court to allow the foreclosure auction to continue. In Chapter 13, the Bankruptcy Court will probably order the house to be sold, unless the owner can afford their payment plan.  Alternatively, if the homeowner can afford the payment plan, then they might have been better off pursuing forbearance, loan modification, or refinance, instead of bankruptcy. 

If considering bankruptcy, we would suggest you seek the advice of a competent attorney.  While many view a foreclosure more harshly than bankruptcy, it should be noted that a foreclosure will appear on your credit report for 5 years, but a bankruptcy will appear on your credit report for 10 years.  Subsequently, anyone reviewing your credit report may choose not to extend credit, rent property to you, etc, and they are not required to do so.  For more information on bankruptcy, you may want to go to - Bankruptcy Courts

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