Bankruptcy and Foreclosure

Facing a foreclosure can be terrifying, but did you know that bankruptcy could immediately stop it? No one wants to purchase a home and then stop paying for it. The truth is that many issues beyond the debtor's control can create a financial strain, including mortgage lending abuse, predatory lending, and subprime loans. Many people are not educated about the loan process and end up in loans they do not understand.

 

What Causes Foreclosures?

The rise in the number of bankruptcies recently has a direct correlation with the increased number of subprime mortgages that have been so easy to get. In recent years, lenders were offering mortgages to people who simply should not have qualified for them. Borrowers' credit ratings were below the prime level required to qualify for a conventional loan, so lenders approved them for subprime loans instead.

 

Those getting approved for subprime mortgages were typically people whose FICO scores were below 680. Many such people also had late payments, missed payments, foreclosures, repossessions, and even bankruptcies already on their credit history. These things should have been red flags for lenders. Giving them subprime mortgages was a disaster waiting to happen.

 

Many subprime mortgages are also adjustable-rate mortgages, or ARMs. These loans start out at a certain interest rate-typically a very affordable one. The rates are adjusted periodically depending on a variety of different factors and indices. The resulting mortgage payments following the adjustments are often beyond debtors' means, causing financial difficulties and a hole that they have no hope of digging themselves out of.

 

How Can Bankruptcy Help?

Before bankruptcy, a home's foreclosure may be bearing down on you. In fact, it may be one of the significant factors leading you toward bankruptcy. A home is typically the biggest investment that most people will ever make. Therefore, when you get to the point of facing foreclosure, it means that often many other debts are also in arrears. For this reason, bankruptcy may be a wise option.

 

Don't worry about your credit if you file for bankruptcy in this case; in reality, being in foreclosure is often worse on your credit than having declared bankruptcy. Impending foreclosure means that you are behind on your most important loan, and your credit score is negatively affected and dropping with each passing month. In contrast, a bankruptcy can sometimes even increase a bad score because of the zero balances that show up.

 

Filing for bankruptcy causes a temporary stay to be in effect against creditors. Those that you owe cannot make any attempts at collection, foreclosure, or repossession while you are filing for bankruptcy. So if you need to buy yourself some time, bankruptcy may be the way to do it. You will at least have the period of time between filing and your court date to regroup and make a plan for the future, including whether or not you will keep the home in question.

 

Foreclosure and Chapter 7 Bankruptcy

Chapter 7 bankruptcy will indeed slow down foreclosure, as the temporary stay will force the lender to stop any proceedings. However, Chapter 7 does not include renegotiating debts, and it cannot help you save your home. Instead, you'll need to come up with the money to pay the amount in arrears, usually by the time the temporary stay expires. Once your bankruptcy is discharged and your debts are wiped clean, you will have more of your income available to pay your mortgage payments.

 

Foreclosure and Chapter 13 Bankruptcy

Filing for Chapter 13 bankruptcy gives you the opportunity to redeem yourself with the mortgage lender. If you are behind on your payments, this type of bankruptcy allows you to work out a repayment schedule for the mortgage payments in arrears. It is the single best way to avoid losing your house, and it gives you some hope in terms of catching up on your outstanding debt.

 

If you are facing foreclosure, then you have some tough choices to make. It is crucial to speak to a bankruptcy attorney for professional guidance. Bankruptcy can save your family's home.