When researching options for preventing foreclosure, expect to encounter conflicting opinions regarding the most effective strategy. That's to be expected, because personal finance is exactly that – personal. What makes sense for one person's financial situation may not be the right move for a person with slightly different circumstances. Some homeowners choose a strategy that includes filing bankruptcy to avoid foreclosure. Careful review may lead others to decide they're better served by combining a loan modification program with aggressive foreclosure defense.
Immediate Effect of Filing Bankruptcy
Filing bankruptcy holds a major appeal to stressed homeowners worried about foreclosure. It brings foreclosure proceedings to a temporary halt, offering the homeowner a bit of respite from the ticking foreclosure clock and buying some time to find a solution. That's because once bankruptcy is filed, no further action, including foreclosure, can be taken by the home loan lender without approval by the judge. Filing bankruptcy to avoid foreclosure has become an increasingly popular tactic.
The Right Financial Circumstances
The best scenario for using filing bankruptcy to avoid foreclosure is when stopping the clock allows a homeowner to make up the missing mortgage payments and get back on track. When the mortgage payments were comfortable and it was only an interruption of income, such as a lay-off, that caused the problem, and the income has been restored so the payments can be made, the bankruptcy tactic can work. It may not be as effective in other circumstances, such as the monthly payments being too high. Chapter 7 and 13 have different effects on a foreclosure situation, depending on the financial context. It's important to choose correctly when filing.
When Chapter 7 Is Used
Filing a Chapter 7 bankruptcy handles unsecured debt, such as credit card debt, leaving secured debts, like the home loan, to be paid off. This strategy works when alleviating the burden of the unsecured debt leaves enough financial room to make the payments required for the secured debt. If a homeowner trying to use bankruptcy to avoid foreclosure isn't prepared to make the mortgage payments, then it isn't likely that the foreclosure will be avoided, only delayed.
Chapter 13 Situations
Filing Chapter 13 can be the better choice for more complex financial circumstances. Debts and their repayment schedules are reorganized and prioritized, usually giving the homeowner between three and five years to their finances in order. One strong advantage to Chapter 13 is that in some circumstances a second mortgage can be reclassified, becoming unsecured debt, rather than secured. That can happen if the second mortgage is a home equity loan, the amount of which is no longer secured by the home, due to a decreased in value. Unsecured debt is often settled for far less than the original amount, a factor in the significant credit score reduction typical after bankruptcy.
Bankruptcy Is an Important Financial Tool
Bankruptcy is a valuable, effective tool for dealing with a serious debt situation. In the same way that prescription medicines have off-label uses to treat certain health conditions, bankruptcy can be useful in financial situations beyond those it was originally intended to resolve. However, it's important to recognize that there are risks involved when the primary motivation for filing bankruptcy is as a means to another financial end, such as preventing foreclosure.
Foreclosure-Specific Strategy May Be Best
An experienced foreclosure defense team, providing both loan modification assistance and legal representation, can help you craft a strategy based on the specifics of your finances. That's important to protect your home from foreclosure in the long-term, as well as the short-term. Too many homeowners avoid foreclosure in the short-term, only to lose their homes in the long-term because the terms weren't a good fit. A quality foreclosure defense program that provides assistance from start to finish, from the loan modification through the entire legal process, is your best path to a solution that really works for you.photo credits: kenteegardin via photopin cc, StockMonkeys.com via photopin cc