Bankruptcy and Foreclosure

With the recent downturn in the economy, and, in particular, the real estate market, many people are faced with prospects of foreclosure on their homes.  Bankruptcy can help in many ways for these individuals, but the impact bankruptcy will have depends largely on the timing of the bankruptcy filing.

Filing bankruptcy before foreclosure:

Individuals that have missed mortgage payments often find themselves receiving nasty letters from their lenders.  They are the classic “you’re behind, pay soon…or else” demands.  If you are unable to meet these demands, lenders forward your loan information to a firm who specializes in foreclosures.  The next letter you receive will likely be certified mail, and the contents will likely include a foreclosure sale date for your home.  Don’t panic; bankruptcy can help.

Chapter 13 is a court-approved repayment plan that allows you to pay your debt over time.  Not only does filing a Chapter 13 before the foreclosure sale date stop the scheduled sale, but it may also afford you an opportunity to save your home.  In Chapter 13, you are given the opportunity to catch up or “cure” all the missed payments that the lender demanded in their nasty letters.  Not all individuals can afford to do this, but if your income and job situation has improved (which may have been the reason you got behind on payments in the first place), or someone is now helping you financially, Chapter 13 can help.

Chapter 7 can also stop the scheduled sale, but it does not provide the catch up period that Chapter 13 does.  Filing Chapter 7 before the foreclosure typically serves to provide individuals with additional time to find other living arrangements, which could be as much as 60 to 90 days, or even more.  Another benefit to Chapter 7 is that it allows an individual to discharge any deficiency (where the foreclosure sale amount is less than the amount you owe) balance that may result from the sale.

Filing bankruptcy after foreclosure:

Sometimes individuals ignore the nasty letters from their lenders.  They may also ignore the certified mail letters from a foreclosure firm, and, their homes will be sold at a foreclosure sale without them even knowing.  This can lead to eviction suits, collection actions, etc.

If you are faced with any of these situations, bankruptcy can still help.  If you are still in your home and the new owner is seeking to evict you, bankruptcy can stop the eviction suit.  It will not provide you with an indefinite holdover in your home, but it will provide you with additional time to find other living arrangements.

If your lender is suing you for the balance of your mortgage post-foreclosure, bankruptcy can also help.  While it is not common for a first mortgage lender to pursue you, it is common for second mortgage lenders to sue individuals for the typically large deficiency balances resulting from foreclosure sales.  If they are successful, they can seek to recover your non-exempt assets, garnish your bank account, or even your wages.  Before it gets to that point, seek bankruptcy help.  Filing a Chapter 7 or Chapter 13 bankruptcy can discharge the deficiency balances owed to the mortgage lenders and remove a huge financial burden from your shoulders.

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