Foreclosure After Bankruptcy… Some Facts You Ought To Know

Bankruptcy is a harrowing experience for anyone who has gone through it. You stand to lose your social reputation and credibility when you file for bankruptcy. Moreover, bankruptcy leaves your credit score in tatters and you would find it almost impossible to get any credit after bankruptcy.

How does bankruptcy affect foreclosure?

Some people are under this wrong notion that bankruptcy will help them avoid foreclosure altogether or bankruptcy is a better option than foreclosure. It is better to have complete and correct information and then take the decision lest you are regretful of your decision later.

So, you need to clearly understand the effect of bankruptcy on foreclosure and not jump to conclusion that bankruptcy is a means to avoid foreclosure. It would be best to consult a real estate lawyer of repute in order to completely understand/discuss the options available to you and finalize the one that best suits your situation. And let’s remember that bankruptcy has to be always treated like the last resort.

Filing for bankruptcy has to be a carefully thought out decision. You have to evaluate your financial position and look for options to avoid bankruptcy (e.g. through selling your assets or through renegotiating terms with your creditors or through refinancing etc.).

If you feel that your financial problem is temporary and, with your current sources of income/job etc., you would be able to tide over the financial crisis in a few months… and would be back to making timely payments on your mortgage, then you should talk to your mortgage lender about the situation and try to work out an arrangement which would help you continue with your mortgage in the tough time. Since lenders too don’t prefer foreclosures or bankruptcies they would be willing to work out a solution with you (it will help the cause if you have had a good repayment history in the past). In such a case you would not need foreclosure or bankruptcy. Also try out debt consolidation and explore other options with professional debt consultants.

If bankruptcy still turns out to be the only option, you must evaluate which type of bankruptcy to file. Again, the nature of your financial problems (temporary/permanent) would be a crucial input in deciding this.

The most common types of bankruptcy are – Chapter 7 bankruptcy and Chapter 13 bankruptcy. In Chapter 7 bankruptcy, you would get rid of all unsecured debts but secured debts like mortgages might be exempt. In Chapter 13 bankruptcy, your debts would be reorganized to enable you to make monthly payments which are used to make payments to your creditors as per the payment plan decided through bankruptcy proceedings.

Since bankruptcy means settlement/reduction/reorganization of your debt, your total monthly payments (if any) after bankruptcy would be reduced quite a bit. So, you might be able to manage the monthly installments on your mortgage loan and hence prevent foreclosure after bankruptcy. This is an important factor that you must consider when doing your calculations.

Does bankruptcy stop foreclosure?

When you file for bankruptcy, you get temporary relief (legal term for this ‘automatic stay’) from collection calls from your creditors (including collection activities by your mortgage lender). This temporary relief is only for a short period of time i.e. till the time your bankruptcy case is settled. However, mortgage lender might approach the court and get permission from the court to start foreclosure proceedings on your mortgage loan even during the automatic stay period.

Once the automatic stay period is over, the mortgage lender doesn’t need to approach the court to get permission to move foreclosure proceedings against you. The mortgage lender can immediately proceed with foreclosure. So, bankruptcy doesn’t really stop foreclosure and it might just delay it a bit. In many cases the foreclosure might be done during the process of bankruptcy itself.

In any case, you should seek advice from a seasoned real estate professional/lawyer that deals in such matters as foreclosure after bankruptcy.


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