Filing Bankruptcy to Stop Foreclosure – Good Idea or Not?

Whether or not to file bankruptcy to stop foreclosure is one of the most important decisions homeowners will make when faced with the loss of their homes. Declaring bankruptcy is devastating to your credit score and should be avoided, but in some cases it can be considered if all else fails. In a scenario where the homeowners are running out of time and the lender is unwilling to stop the sheriff sale, bankruptcy may be one of the only options that would give foreclosure victims some extra time and an opportunity to put together a longer-term solution. Knowing when to file bankruptcy and which type is most appropriate, however, can be just as difficult as deciding whether or not to file bankruptcy in the first place.

Before even considering declaring bankruptcy, it is important to first consult with a lawyer. Having competent legal counsel ensures that the process will be followed lawfully and that the homeowners will be adequately represented while dealing with the court system and creditors. A lawyer is actually recommended in any foreclosure situation, however a lawyer is crucial in dealing with declaring bankruptcy. If a lender has hired attorneys to pursue homeowners for their house, it is in every homeowner's best interest to seek out legal counsel. This will help them understand the situation and what their rights are under state foreclosure laws.

It cannot be emphasized enough how important it is for homeowners to do research themselves even before hiring an attorney. This will allow them to make an informed decision concerning their attorney and will not force them to rely on the sometimes inaccurate information provided by others. Having a basic understanding of the foreclosure process and what is involved in filing bankruptcy is essential for homeowners to keep control of their homes and end foreclosure. Homeowners should never blindly trust anyone, without a basic understanding of how foreclosure works and how bankruptcy can affect the process.

One major consideration in the decision to file bankruptcy is how expensive the payment plans will be. During a Chapter 13 that includes the house and all mortgage loans, the homeowners will be obligated to pay both the court-ordered plan and the regular monthly payments. For homeowners still in an unstable financial position, these payments can be difficult and there is a risk of falling behind again. If a payment is missed during a Chapter 13 bankruptcy, the case may be dismissed and the lender will be able to proceed with the foreclosure as if the bankruptcy never happened.

Another important consideration for the homeowner is how much income would be freed up if the homeowners kept their home and filed a Chapter 7 bankruptcy instead. This would wipe out some of their unsecured debts, like credit cards or personal loans, and may put enough money back in their monthly budget to catch up on mortgage payments. It is important to consider how much money would actually be freed up, and if the mortgage company would accept a repayment plan where the homeowners pay extra every month until they are caught up. If the situation is right, this may be a more beneficial solution for all parties involved.

One of the most useful aspects of filing bankruptcy is simply that is allows the homeowners to put the entire foreclosure process on hold. The law lets them take a break while they seek protection under the court and establish a plan to get their payments back on track. Regardless of how much time there is before the foreclosure auction, filing bankruptcy will immediately put the process on hold and stop the sheriff sale. In this case, the homeowners gain time to avoid foreclosure under the bankruptcy plan.

In most circumstances involving missed mortgage payments, filing bankruptcy to stop foreclosure is not the best solution. If the homeowners' income has not recovered from the hardship that led to foreclosure, bankruptcy can result in a very expensive payment plan that will end up hurting the homeowner more than it helps. Other options, such as refinancing, a short sale, or giving the property back to the bank via a deed in leiu of foreclosure, should be considered both before and after filing,. It is also very important that homeowners seek out competent legal counsel during any part of the foreclosure process, especially when they are considering filing bankruptcy.