Filing for Bankruptcy to Avoid Foreclosure

Is Chapter 7 Bankruptcy or Loan Modification the Right Option?

Jul 15, 2009 Asa Ghaffar

When faced with financial difficulties, paying the mortgage seems impossible. Find out how filing for bankruptcy can help a homeowner to avoid foreclosure.

Whilst filing for bankruptcy still has a stigma attached, it can help a homeowner to avoid foreclosure. Whilst it can take as long as 6 months to repossess a home in California due to the involved legal proceedings, the process takes as little as 30 days in Texas. This doesn't give a homeowner long to negotiate a loan modification, whereas chapter 7 bankruptcy can stop foreclosure, debt collection activity and clear debt in just 4 to 6 months. This will alleviate financial difficulties considerably.

Filing for Bankruptcy Requires a Credit Counseling Session

The bankruptcy laws were amended in October 2005 which means that the insolvent must now undergo credit counseling from a non-profit agency approved by the Justice Department's U.S. Trustee Program. A fee of up to $50 can be charged for this service, but it is a small price to pay to avoid foreclosure. It does mean that a homeowner will need to act quickly in a non-judicial state, such as Texas.

Stephanie Osterland, a credit counselor at GreenPath Debt Solutions, said that the counseling session was "to help put you on a more solid financial footing no matter what you decide to do." This can also help in terms of deciding whether a loan modification is a better alternative.

How to Avoid Foreclosure by Filing for Bankruptcy

Filing for bankruptcy results in an immediate stay on repossession proceedings and full court protection from creditors. Not only that, it is possible to clear debt on credit card and other sources of unsecured lending. This helps to free-up funds that can be used to make mortgage repayments and catch-up with any arrears. However, mortgage refinancing can be more difficult as filings show on personal credit reports for either 7 or 10 years. In practice, a FICO score can start to improve after a couple of years.

Chapter 7 Bankruptcy or Chapter 13 Bankruptcy?

Filing for bankruptcy provides a homeowner with the opportunity to avoid foreclosure and clear debt. Whilst chapter 7 bankruptcy concerns a complete debt write-off in just 4-6 months, chapter 13 is concerned with restructuring debt. The latter is the option of those who have non-exempt assets or an income that is above the state median. Both will stop repossession, but chapter 13 will mean that a debtor will be expected to make a contribution to creditors for the next 3 to 5 years.

It is possible to avoid foreclosure by filing for bankruptcy under either chapter 7 or chapter 13. Try to get help with financial difficulties before an urgent need arises as it may be possible to get a loan modification or even arrange a short sale without affecting a FICO score. It may also be possible to arrange a repayment plan with creditors without going down either of these routes.

Sources

Sichelman, Lew. (July 12, 2009). "Bankruptcy is an option for homeowners trying to avoid foreclosure." The LA Times.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

The copyright of the article Filing for Bankruptcy to Avoid Foreclosure in Mortgages/Loans is owned by Asa Ghaffar. Permission to republish Filing for Bankruptcy to Avoid Foreclosure in print or online must be granted by the author in writing.