Hanging On to Your Home: How Bankruptcy Can Stop Foreclosure
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Hanging On to Your Home: Foreclosure and Bankruptcy


If you have watched any TV or listened to any radio over the last few months, you may have heard advertisements inviting the public to bid in auctions of foreclosed properties.

For most people, it’s a depressing sign of the times, but for some families, the slow montage of abandoned homes may show a glimpse of the American dream they left behind.

House prices are still falling and more borrowers wake up each day with a home worth less than what they owe to their mortgage lenders.

Walking away from a home and a mortgage might seem like a tempting option when you feel overwhelmed by debt, but be warned that an easy exit puts you at risk of significant consequences.

Walkaway Borrowers

Fannie Mae and Freddie Mac, the two primary government-sponsored mortgage lenders, are taking a hard line against walkaway borrowers.

Under new guidelines set down in March, Fannie Mae requires that new borrowers be foreclosure-free for five years in most cases, put down a down payment of at least 10% and have a FICO credit score of 680 or above.

Furthermore, Freddie Mac has reportedly begun actively pursuing borrowers who have walked away from their loans.

Foreclosure can have a significant and negative impact on your credit score for seven years, which can lead to high interest rates on what credit you are able to secure and may make it difficult for you to obtain new credit, such as car or student loans.

Your credit may even impact your ability to purchase insurance or hold certain jobs.

Foreclosure Options

Instead of walking away, consider these alternatives to help stop foreclosure:

  • You can negotiate. Congress has enacted a law that excuses homeowners who are able to negotiate with their lenders for a decrease in mortgage payments from paying taxes on the amount of debt being forgiven. Many experts point out that foreclosure is not always inevitable in cases when a borrower moves quickly to address payment issues.
  • Consider filing under Chapter 13. Chapter 13 has proven to effectively prevent foreclosure for many homeowners. When you file bankruptcy, the automatic stay will likely be enacted to protect you from foreclosure and you’ll be able to work out a repayment plan.

In Foreclosure? Be Wary of Predators

Keep away from foreclosure-promoting sites that promise to help you navigate the foreclosure process smoothly.

These sites often peddle costly services and gloss over the damage a foreclosure can do to your overall financial health.

Remember, foreclosure is tough on lenders, too, and they are often willing to discuss terms with struggling borrowers.

Making slightly less money by adjusting a loan’s terms is often better for their bottom line and you may have more negotiating power than you think.

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