What Are the Benefits of a Bankruptcy When Going Into Foreclosure?
If you're facing foreclosure on your home, you've probably been told that bankruptcy can help you keep your home. This is true, but only if you are able to repay the mortgage after the bankruptcy has been discharged, plus any amount in arrears that will also have to be repaid.
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How Bankruptcy Stops Foreclosure
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When you file for bankruptcy, any attempts to collect debt owed on your home or to repossess your home are halted.
The type of bankruptcy you qualify for will determine how long collection actions and foreclosure can be stopped. In Chapter 7, or liquidation bankruptcy, all unsecured debts are erased. This process usually takes about two months. In Chapter 13 bankruptcy, your debts are reorganized to give you a three- to five-year period to repay some or all of your debt.
Chapter 7 Benefits
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If you have a steady income, and factors such as overwhelming unsecured debt in the form of credit cards, a second mortgage or medical bills have made paying all of your bills impossible, then a Chapter 7 bankruptcy can help you keep your home by erasing these debts to make it feasible to make your house payment.
Known as a "fresh start" bankruptcy, Chapter 7 liquidates any assets in order to repay creditors. In some states, it may be more difficult to keep your home; consult a bankruptcy attorney before filing Chapter 7 with the intention of keeping your home out of foreclosure.
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Chapter 13 Benefits
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Filing Chapter 13 bankruptcy makes it easier to keep assets such as a home, because most, if not all your creditors will be repaid something under the debt reorganization plan you enter into as a result of the bankruptcy.
In many cases, loans such as second mortgages or home equity lines of credit that make it difficult to pay your mortgage will be erased, allowing you to make paying your mortgage a priority.
Considerations
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While a bankruptcy filing can prevent foreclosure, there are at least two instances in which it will not.
First, it depends upon the type of mortgage you have and your lender's willingness to modify it. If you have an adjustable rate mortgage, and the rate will adjust after you file bankruptcy, you're back at square one with being unable to make the payment. Unless your lender will modify the terms of your mortgage, bankruptcy will not help.
And, if you have lost income due to disability or unemployment, even a bankruptcy may not free up the money you will need to continue making your house payment.
Talk to a bankruptcy attorney to determine whether either of these situations will complicate your situation.
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