Foreclosure and Bankruptcy
One popular choice taken by many distressed
homeowners is to file for bankruptcy. The general perception
is that bankruptcy is the best way to stop a foreclosure.
Foreclosures create a very lucrative business for bankruptcy
lawyers, but often at the detriment of homeowners. Even filing
for bankruptcy has its limitations. Learn more about bankruptcy
and obtain the advice of a reputable attorney before you proceed.
What is bankruptcy?
Bankruptcy is a legal procedure that allows
individual debtors to seek protection from their creditors.
There are two types of bankruptcy filings available to debtors:
Chapter 7 requires the liquidation
or selling of the debtor’s assets to pay off
creditors. With certain limitations, it liquidates all unsecured
creditors and gives the debtor a fresh start. Although this
sounds appealing, chapter 7 will in most cases require the
homeowner to sell the property if they are not current with
the mortgage at the time that they file bankruptcy.
Chapter 13 restructures the debt
into a payment plan, to pay back a portion of the
debt to the creditors over time. Chapter 13 allows homeowners
to keep their home as long as they qualify to pay on a court
ordered payment plan.
Is chapter 13 right for you?
Chapter 13 is only an option if you have a regular income
stream. It makes sense for homeowners in temporary distress
due to a job loss, medical bills, etc. Don’t
waste your time and money with a bankruptcy attorney if you
don’t have the money to make the court ordered payments.
Keep in mind that the payments under the chapter 13 are often
higher than the original mortgage payment. If you don’t
have the income, or fall behind with your payments later on,
the bankruptcy will be dismissed, and the foreclosure will
start again.
Our advice
1. Don’t wait until the last minute. Interview reputable
bankruptcy attorneys several weeks before the foreclosure
sale. Keep in mind that bankruptcy attorneys earn money from
filings. Take time to review the legal documents carefully.
2. Learn what your approximate monthly payment would be under
the proposed chapter 13 plan. Don’t proceed if you are
not fairly certain that you can afford the new payment.
3. Don’t use bankruptcy as a temporary delay tactic.
Filing for bankruptcy is expensive. In most cases, homeowners
pay their own attorney fees, court costs, and - with many
mortgage agreements - even the lender’s attorney fees.
This will eventually eat into your home's equity.
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