Can Filing for Bankruptcy Save You from Foreclosure?

foreclosure notice with gavel

When a person is facing the possibility of losing their home, they will most often do whatever they can to keep it, even if it means taking drastic measures. Bankruptcy is one such action that is typically considered a last resort for most people deeply in debt. When in foreclosure, however, it could just be the option that helps a homeowner keep their home.

Before filing for foreclosure, homeowners need to assess if this is really the right option for them. While bankruptcy can help discharge debts, it can also wreak havoc on a person’s credit rating for years. For this reason, those considering bankruptcy as an option to keep their home need to determine if the benefits outweigh the disadvantages.

Bankruptcy Options in Foreclosure Proceedings

Legally, bankruptcy offers a person a status that states they cannot repay their debts, and gives them legal freedom for those debts. While the United States Bankruptcy Code outlines six different types of bankruptcy, the most common types filed are Chapter 7 and Chapter 13 bankruptcy.

Those that have time to explore other options in foreclosure proceedings may wish to file for Chapter 7 bankruptcy. This type of bankruptcy will discharge unsecured debt, such as credit card debt. It will not, however, discharge secured debts, such as a mortgage. Due to this, a Chapter 7 bankruptcy will delay a foreclosure proceeding, but is unlikely to stop it altogether.

That doesn’t necessarily mean that Chapter 7 is never appropriate for homeowners facing foreclosure. If proceedings have just begun, a Chapter 7 bankruptcy can certainly provide the homeowner with more time to review all of their options and find a way to keep their home.

Chapter 13 bankruptcy, on the other hand, allows debtors to repay their past debts within a certain period of time, typically three to five years. These payments are made on a monthly basis and, if the debtor can repay the past due amount on their mortgage over that time, this is a viable option for homeowners facing foreclosure. However, under Chapter 13 bankruptcy, the mortgage will remain as is. This means that modifying the terms of the mortgage, including the interest rate, principal balance, and monthly payments, is not possible.

Alternatives to Bankruptcy

Again, while bankruptcy can provide relief in foreclosure proceedings, it’s still an option homeowners should only explore as a last resort. While bankruptcy can help delay foreclosure or create a payment plan that is easier for the homeowner to follow, it also has several consequences. When homeowners want to avoid these consequences, they may choose another option that can help stop foreclosure proceedings.

Two possible options are a short sale or a deed in lieu of foreclosure. A short sale involves the homeowner selling the home for less than what is owed on it. If the bank agrees to this arrangement, the homeowner lists the home for sale in the hopes that there is a buyer for it. A deed in lieu of foreclosure gives the bank the deed to the home, rather than foreclosing on it. The bank will then sell it in the hopes of recovering the cost of the loan.

Unfortunately, both of these options will result in what most homeowners fear most – losing their home. Neither a short sale or a deed in lieu of foreclosure allows the homeowner to remain in the home. While they will not have a foreclosure on their credit report, a deed in lieu of foreclosure will appear, and the consequences of that are typically just as significant.

The only way for homeowners to keep their home when facing foreclosure is to modify their mortgage loan. This is known as loan modification and will permanently change some terms of the mortgage. The terms modified may include the interest rate, the principal balance, or the monthly payment. A loan modification can change one or more of these terms.

In order to be eligible for a loan modification, the homeowner must first submit an application to the lender. This application must include documentation showing the homeowner’s income, expenses, and other financial information. If the lender approves the loan modification prior to 37 days before the foreclosure sale date, the lender must stop the sale date.

This doesn’t always happen, though. In some cases, the lender will state the application was incomplete, and so they won’t cancel the sale date. In other instances, homeowners that apply for a loan modification are not always approved by the lender. It is completely up to the lender to decide if they want to modify the loan or continue with foreclosure proceedings.

Which Option is the Right One?

While facing foreclosure may seem hopeless, homeowners have many options available to them. Bankruptcy and loan modification may allow homeowners to keep their home. However, when neither of these is an option, homeowners may need to decide whether a short sale or deed in lieu is the most viable option for them.

When considering these options, homeowners will need to take many things into consideration. They will have to decide if they are capable of making payments in the future, how much time they have before the foreclosure proceeds, and what option will do the most damage to their credit rating. Weighing all the options, and their pros and cons, is the only way anyone can determine which choice is right for them.

Discuss Your Options with a Fort Lauderdale Lawyer

It’s difficult for people to understand what all their options are, let alone which one is best for them. If you are facing foreclosure and think bankruptcy is a good option for you, or you’d like to discuss other options available, call a Fort Lauderdale foreclosure defense lawyer who can help.

If you’re in foreclosure, contact the Loan Lawyers at (954) 523-HELP (4357). We’ll outline all the solutions that might work for you, and help you with whatever option you choose. Learning that the foreclosure process has started is scary, but it may not have to happen at all. Call us today to learn more about how we could help you keep your home.

Loan Lawyers has helped over 5,000 South Florida homeowners and consumers with their debt problems, we have saved over 2,000 homes from foreclosure, eliminated more than $100,000,000 in mortgage principal and consumer debt, and have recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations. Contact us for a free consultation to see how we may be able to help you.