How Bankruptcy Can Help Stop Foreclosure

If pre-foreclosure resources have been expended and the lender had formally initiated foreclosure proceedings, bankruptcy is an option to stop foreclosure if a short sale or obtaining a deed in lieu of foreclosure fails. Bankruptcy can stop all debt and is an option if your debt grows too difficult to clear.
Bankruptcy could be preferable to foreclosure since it erases debt and so the borrower can build good credit sooner. A foreclosure will put a large dent in the credit score and but does not cancel the debt so it may take longer to build credit.
Filing a Chapter 13 or Chapter 7 bankruptcy allows the court to issue an "automatic stay" that directs creditors to cease their collection activities. This stop is active for three to four months while bankruptcy proceedings are held. Be warned that a lender could motion to lift the stay and proceed with the foreclosure if you begin proceedings too late.
Chapter 13 Bankruptcy Advantages
Also known as a wage earner's plan, borrowers can develop a repayment plan to make installments to creditors over three to a maximum of five years. During this time, creditors cannot continue their regular collection efforts. However, borrowers must still make all mortgage payments within the Chapter 13 plan on time. Other secured debts can be rescheduled over time to lower the payments. Borrowers make the payments to a Chapter 13 trustee who then distributes payments to creditors so there is no direct contact between creditors and the debtors.
Chapter 7 Bankruptcy Advantages
Chapter 7 bankruptcy will erase the debt that is secured by a borrower's home. However, the bankruptcy trustee gathers and liquidates the debtor's nonexempt assets to pay the creditors. FORECLOSURE IS NOT CANCELED. The borrower's home will be used as collateral as well.
But during a Chapter 7 bankruptcy, a borrower can live in the home for free during bankruptcy proceedings so the borrower can look for a new place to live during the proceedings.
To be eligible for Chapter 7 bankruptcy, the borrower (1) must have an average gross income six months prior to the proceedings to be less than the state median income and (2) must not be eligible for the Chapter 13 repayment plan.
This article is written by Timothy McFarlin - an experienced loan modification attorney. Tim has over 10 years of loan modification and bankruptcy experience and has helped many corporations and people with securing a better life. You can visit his website at McFarlin and Geurths LPP Law
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