- Personal Finance
Bankruptcy and Foreclosures: Should You File Bankruptcy to Stop Foreclosure?
Avoid Foreclosure: Is Bankruptcy the Answer?
As home foreclosures continue to rise, more and more homeowners are asking themselves some hard questions about their finances. One solution on the table for many is the dreaded “b” word – bankruptcy.
According to the CNN Money article, "Bankruptcies Spike 33%", The total number of bankruptcies filed in the third quarter surged 33% in 2009 and is at the highest level since 2005.
The article goes on to note that this uptick in filings can be attributed to the weak, what some call “jobless recovery” economy. And, the statistics bear this out. Unemployment for the nation at the time of this writing remains at a 26-year, double-digit high 10 percent. This alone this has led to a lot of foreclosures.
When you factor in the homeowners who caused the first wave of foreclosures, ie, those caught up in the subprime mortgage mess, then what you have is a continuing spiral in the housing market.
Now that you know why so many homeowners may be considering bankruptcy, let’s explore the question of “should you file bankruptcy to stop foreclosure” in detail.
The short, direct answer is that while bankruptcy may stop foreclosure, it’s may just be a band aid on a head wound, ie – it won’t stop the bleeding. To understand why, let’s dig deeper to examine what happens when a homeowner files bankruptcy in hopes of preventing foreclosure.
There are two types of bankruptcy that most homeowners (individuals) file: Chapter 7 and Chapter 13. Which type you file depends on a host of factors, eg, your total debt load, your assets, your ability to repay or not, where you live, etc.
Filing Bankruptcy to Stop Foreclosure: The Process
When you file bankruptcy, an "automatic stay" goes into effect. This is good, for it prevents your creditors from moving ahead with any collection efforts -- for the moment at least. This includes selling your house on the courthouse steps.
To get around this "stay," a creditor has to first petition the bankruptcy court to lift it. And, they can be successful, at this too, which is why filing bankruptcy to stop foreclosure is a temporary measure. How/why do courts lift stays at the request of creditors?
Avoiding Foreclosure: How You Can Still Lose Your Home Even If You File for Bankruptcy
Let’s use and example to explain. Let's say your house is about to be sold at a foreclosure auction on the courthouse steps. So, you rush to file bankruptcy to stop this from happening.
Your lender (mortgage holder) will most likely petition the court to lift the stay. And if you can’t pay the arrears (ie, bring your mortgage current), or don't have any equity in your house and/or your finances are such that the court feels you really can’t afford the monthly payments, your lender will get the stay lifted.
Once this is done, they can proceed with the sale of your house at a foreclosure auction.
From a creditor’s standpoint, this is fair because when you take out a mortgage, it is with a promise to repay. If you can’t then they have every (legal) right to sell any of your assets (ie, your home) to collect on the debt.
Avoiding Foreclosure: The Biggest Mistake Most Homeowners Make
There are so many options available to homeowners to stop foreclosure. And, the biggest mistake many make is not contacting their lender early enough.
When you first get in financial trouble, pick up the phone. Although it is a nightmare to get them to talk to you – especially if you are still current with your mortgage payments – it is worth the effort. Why? Because even if you file bankruptcy in hopes of stopping foreclosure, you are still going to have to work out a payment plan with your lender.
So at some point you’re going to have to deal with them anyway.
Avoiding Foreclosure: The Biggest Mistake Most LENDERS Make
As mentioned above, many lenders won’t work with homeowners who are current with their payments. Even when the homeowners call and say, “Hey, I’m heading for trouble here. I lost my job and don’t have any savings beyond another month.”
Avoiding Foreclosure: Should You Stop Paying Your Mortgage to Get Your Lender’s Attention
Although lenders won’t say it, most don’t take you seriously until you start to miss payments. In fact, some financial experts will advise you – on the down low, of course – to stop paying to get their lender’s attention.
If you do decide to do this, please keep the money on hand. Don’t spend it just because you’re NOT paying your mortgage.
If you really think you won’t be able to pay because you just lost a job and don’t know how long it’s going to take to find another one, cut back on your spending and keep as much cash on hand as possible. Because, if you do work out a mortgage modification, a forbearance or some other option, you can still limp along until your fortunes start to take a turn for the better – without losing your home in the process.
Learn more about what happens when you stop paying your mortgage.
Stopping Foreclosure: The Bottom Line
The bottom line on filing bankruptcy to prevent foreclosure is this: if your financial situation is temporary and you just need some time to get back on your feet, you probably shouldn't go this route.
Before making a final decision, consult a qualified bankruptcy attorney; one familiar with the laws in your jurisdiction. They will be able to give you some insight into deciding if filing bankruptcy is the right solution to stop foreclosure on your home.
Foreclosure Help: Life After Foreclosure
Get insight into what happens after foreclosure; what your financial options and obligations are.