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Bankruptcy May Help Stop Foreclosure

As home foreclosure numbers continue to rise, many homeowners are searching for ways to save their residences. One of the most effective methods to put a halt to foreclosure proceedings is filing for personal bankruptcy.

According to a recent article published at CNNMoney.com, the benefits of bankruptcy extend well beyond the reorganization of debts, or silencing of creditors. Bankruptcy may also help struggling homeowners keep their homes.

How is Bankruptcy Designed to Stop Foreclosures?

Lenders cannot foreclose on a property until they receive permission from a court. As a result, if a homeowner files for bankruptcy before the foreclosure occurs, a court may put a temporary hold on the foreclosure process.

If an individual files for Chapter 7 bankruptcy, he or she will likely be able to, at the very least, slow the foreclosure process. However, Chapter 7 is better suited for people trying to eliminate unsecured debts, like medical expenses, credit card debt, and utility bills. As a result, home mortgages are difficult to dismiss under Chapter 7 bankruptcy.

On the other hand, many experts say that filing for Chapter 13 bankruptcy can be a more effective way of stopping foreclosure altogether. Here are some attractive features of Chapter 13 bankruptcy:

• Breathing room: The court usually gives filers three to five years to settle their finances, and creates a realistic budget based on the filer’s income with monthly payments made to a trustee.
• Secured debt goes first: The trustee is responsible for paying the filer’s bills, and usually pays off secured debt first. Since a mortgage is a form of secured debt, it is usually paid off before the unsecured debts, so Chapter 13 may save a home from foreclosure.
• Eliminate second mortgages: While courts cannot lower interest rates or eliminate primary mortgages, they may be able to get rid of second mortgages like home equity loans or lines of credit.

Can Bankruptcy Help Everyone?

As one attorney told CNN, bankruptcy “is the best tool there is for people who are behind on payments but who have ongoing income.” In other words, bankruptcy can help stop home foreclosure if the homeowner has made payments consistently in the past, and is likely to do so again.

While bankruptcy may help many homeowners prevent losing their homes due to foreclosure, it will not necessarily help everyone at risk of losing their home.

Everyone's situation is different. Plus, bankruptcy laws vary by state, so what works for someone in one place may or may not help you. To figure out if bankruptcy is a good fit for you, get the facts about how the laws may apply to you.

A local bankruptcy lawyer may answer your questions and provide information so you can make a smart decision on what to do.