The Truth about Foreclosure

Foreclosure is an issue facing many people who are contemplating bankruptcy. Bankruptcy can be an immediate positive for anyone who is facing imminent foreclosure, but the outcome of your situation will depend on which type of bankruptcy you choose.

Bankruptcy and Foreclosure

Before you look into bankruptcy options, take an honest assessment of your financial situation: Why is it that your home went into foreclosure in the first place? Did you purchase a home with an incredibly large mortgage, one that significantly dwarfs your salary? Are you experiencing a temporary setback due to unforeseen financial circumstances (like medical bills)? Would you be able to get back on your feet if you were given more time to make the mortgage payments?

If you have the income to make up the missed mortgage payments and cannot otherwise work out a deal with your lender, then filing for bankruptcy can offer you a surprisingly attractive alternative to foreclosure.

Chapter 7 Bankruptcy

When you file for Chapter 7, you will receive an automatic stay that will stop your foreclosure until your bankruptcy is discharged. During this period, you will be able to stay in your home-regardless of how far the foreclosure process has gone-if the home has not been sold to someone else by the bank. This period will give you time to save money (because you will not be paying on your mortgage or paying rent to live somewhere else) and find a new place to live.

At the end of the process, you will be forced to give up your home, so Chapter 7 is only a good idea if you know that you will not be able to afford your home any longer (usually in a situation where there has been a job loss or a salary reduction) or if your debt is too large to file for a Chapter 13 bankruptcy.

Chapter 13 Bankruptcy

When you file for Chapter 13, you will also receive an automatic stay that will halt the foreclosure process. However, unlike Chapter 7, a Chapter 13 bankruptcy will allow you to work out an arrangement to bring your mortgage current, pay your mortgage arrears, and get your mortgage back on track so that you can keep your home.

The bad news is that you will still have to pay on all of your debt every month, instead of receiving the clean slate that a Chapter 7 bankruptcy would provide. While you may be skeptical about your ability to keep your mortgage current and pay on all of your other debt, you should know that the court will put you on a fixed fee schedule, which will be the same amount every month for the next three to five years. This schedule will take into account your essential living expenses and put you on an affordable payment plan based on your disposable income.

There is a risk to this because if you miss just one post-bankruptcy mortgage payment, you can find yourself in foreclose once again, so it is important to make sure that you can afford a Chapter 13 plan and that you make every single mortgage payment.

Overall, it is important to assess your current and future financial situation carefully to decide whether Chapter 7 bankruptcy or Chapter 13 bankruptcy will be best to help deal with your foreclosure.