Understanding Bankruptcy and Foreclosure

Filing for bankruptcy is a challenging decision, but it can be a necessary step to prevent losing your home to foreclosure. Bankruptcy can offer a temporary or permanent solution depending on the type of bankruptcy filed. Let’s delve into the details.

Can Chapter 7 Bankruptcy Stop Foreclosure?

Chapter 7 bankruptcy, also known as liquidation bankruptcy, can temporarily halt foreclosure proceedings. This type of bankruptcy is available to individuals whose income falls below the median level for their area. While it can pause foreclosure, it often cannot prevent it entirely. Once the bankruptcy process is complete, the mortgage lender may resume foreclosure unless you can catch up on missed payments.

Can Chapter 13 Bankruptcy Stop Foreclosure?

Chapter 13 bankruptcy, or the “wage-earner’s plan,” can not only halt foreclosure but also provide a pathway to avoid it altogether. If you have a steady income, a court-appointed trustee will help you create a repayment plan lasting three to five years. By adhering to this plan and resuming regular mortgage payments, you can restore your home loan to good standing and avoid foreclosure permanently.

What Is an Automatic Stay?

An automatic stay is a legal provision triggered by filing for bankruptcy. It temporarily prevents creditors, including mortgage lenders, from collecting debts or proceeding with foreclosure. This stay provides you with time to devise a plan to catch up on missed payments or arrange alternative housing.

Which Is Worse for Your Credit, Bankruptcy or Foreclosure?

Both bankruptcy and foreclosure have significant negative impacts on your credit. Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 bankruptcy and foreclosure stay for seven years. Although both events damage your credit score, the effects diminish over time.

Alternative Ways to Stop Foreclosure

Before resorting to bankruptcy, consider these alternatives:

• Mortgage Forbearance: If you face a temporary financial setback, mortgage forbearance can provide relief. You’ll need to demonstrate the ability to resume payments after the forbearance period and repay missed payments within a specified timeframe.
• Sell the House: Selling your home before foreclosure can help you settle your mortgage and avoid the negative impact on your credit. If the market value is less than the mortgage balance, a short sale may be an option, though it requires lender approval.
• Deed in Lieu of Foreclosure: This option involves voluntarily transferring ownership of your home to the lender. It allows you to avoid the foreclosure process and may even include a “cash for keys” incentive to help with relocation.

The Bottom Line

While bankruptcy can temporarily halt foreclosure, its severe impact on your credit should make it a last resort. If you are overwhelmed with debt, Chapter 7 bankruptcy can provide a temporary reprieve, while Chapter 13 bankruptcy offers a chance to catch up on payments and avoid foreclosure altogether.

For expert mortgage services and personalized advice, contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your options and find the best solution for your financial situation.