Some people believe that bankruptcy is the solution to all their problems, especially a foreclosure bankruptcy. After all, being a homeowner is the American dream, and anything that can be done to save their home is often considered worth it. However, there are times when even a bankruptcy won’t stop foreclosure, and it will only cause more damage to their credit rating in the process. It is vital to know what a bankruptcy can and cannot do, what the positive and negative results will be, and if there are viable alternatives for an individual’s situation.
Bankruptcy Positives
There are a number of things that bankruptcy can do to help a homeowner save their home and begin to restore their credit record.
- Automatic stay – every bankruptcy petition begins with the court ordering a stay, or “hold,” on all debt collection efforts. This gives the debtor time to make a plan to make up missing or partial payments and get back on track with their mortgage. However, this stay is not infallible, since a creditor can file a petition with the court to have it lifted for them and it may be granted.
- Chapter 7 – While there is little in the chapter 7 process that will allow a debtor to fully save their home by itself, it can provide time to find other alternatives during the “stay.” If the borrower does end up losing their home, at least they will not be required to pay a deficiency on the remaining debt. In addition, they will not be required to pay taxes on the discharged amount.
- Chapter 13 – This may be the best option for a debtor to save their home. The automatic “stay” gives the filer time to compile a repayment plan for their “priority” debts, like taxes, alimony and child support, student loans, and more; missed mortgage or car loan payments; and consumer debt. During the plan and after it is complete, the debtor will have to continue to keep up their mortgage payments in order to avoid a foreclosure. But with the help of this plan, they have time to get out from under the burden of much of their debt and be ready to focus on their most important ones, such as their mortgage.
Bankruptcy Negatives
There are some obvious negatives that come with filing for bankruptcy. For some debtors, they may open the door to greater hope for financial stability in the future, making it worth it. For others, there are alternatives that they should explore to avoid those negatives:
- Damage to their credit score for as many as ten years, making it impossible to use credit cards, buy a home or car, or obtain any type of credit.
- Damage to their reputation, making it difficult to purchase new insurance or obtain a new job.
- Possibly giving up some of their personal property.
Getting Legal Help with Bankruptcy to Stop Foreclosure
Clearly, there is much to consider when determining if bankruptcy is the appropriate alternative to foreclosure for a financially troubled debtor. There are additional considerations that are unique to each situation that, often, only a skilled bankruptcy attorney can unravel. To be sure they are aware of all the facts, it is wise to consult such a legal expert before making a decision that could affect their financial future for decades.
