Bankruptcy?! It is rare that we recommend filing bankruptcy to prevent a foreclosure, but for certain situations like waiting till the last couple days before your property is auctioned, it can be the right option.
One of the ways to temporarily stop a foreclosure (up to) the day before an auction (and when a homeowner has unsustainable debt beyond the home mortgage) may be to declare bankruptcy. Bankruptcy is another common strategy to avoid foreclosure (temporarily). A home cannot be sold or foreclosed on (auctioned) while in bankruptcy (Ch 7 & 13). A Temporary Restraining Order is a better option to delay or stop a foreclosure, but it really depends on your situation, so talk with Mike and an Attorney to decide if Bankruptcy is a good option.
Sometimes when a homeowner is behind on loan payments and is facing foreclosure, they will declare bankruptcy. When this happens, the lender will file a motion with the bankruptcy court to have the bankruptcy stay on the home lifted (because the owner is not paying the loan). At this point the stay is lifted and the home goes back into foreclosure and to auction. Thus, bankruptcy can be an effective, although only temporary delay of a foreclosure.
Advantages and Disadvantages
The advantages of declaring bankruptcy is that it can be done at the last minute just before the home is actually auctioned off by the lender. Once the bankruptcy is declared, the auction is stopped or nullified until the lender stay lifted.
- Automatic Stay: When you file for bankruptcy, an automatic stay goes into effect, which temporarily halts most collection actions, including foreclosure. This provides immediate relief and gives you time to assess your options and potentially negotiate with creditors.
- Repayment Plans: Bankruptcy offers the opportunity to create a repayment plan under Chapter 13 bankruptcy. This plan allows you to restructure your debts, including your mortgage arrears, into manageable monthly payments spread over three to five years. This can provide a way to catch up on missed mortgage payments and prevent foreclosure.
- Debt Discharge: Depending on the type of bankruptcy filed (Chapter 7 or Chapter 13), you may be able to discharge or eliminate certain debts, which could alleviate your financial burden and improve your long-term financial situation.
- Legal Protection: Filing for bankruptcy provides legal protection against debt collectors, including lenders pursuing foreclosure. This can offer a sense of relief and peace of mind during a challenging financial situation.
The disadvantages of declaring bankruptcy is that some homeowners that declare bankruptcy to stop a foreclosure end up getting a bankruptcy AND a foreclosure on their credit. This is because a bankruptcy only DELAYS the foreclosure, and does not prevent it. Also, fees and missed payments pile up during bankruptcy making foreclosure more likely and less preventable. It is rare that we recommend filing bankruptcy to prevent a foreclosure.
- Credit Impact: Bankruptcy has a significant negative impact on your credit score and can remain on your credit report for several years. This can make it difficult to obtain new credit, secure loans, or even affect future employment prospects.
- Cost and Complexity: Bankruptcy involves substantial costs, including attorney fees and court fees. Additionally, the bankruptcy process can be complex and time-consuming, requiring extensive paperwork and adherence to legal requirements.
- Loss of Assets: Depending on the bankruptcy chapter and exemptions available, you may risk losing certain assets, including non-exempt property, as part of the bankruptcy proceedings. This could potentially include your home if you are unable to protect it through exemptions.
- Long-term Consequences: While bankruptcy provides immediate relief, it has long-term consequences. It can affect your ability to qualify for future loans, impact insurance rates, and may hinder your financial flexibility for years to come.
- Emotional and Psychological Impact: Filing for bankruptcy can be emotionally challenging and may cause stress, anxiety, and a sense of failure. It’s important to consider the emotional toll it can have on you and your family.
If a homeowner’s financial problems can be mostly resolved by selling their property, a short sale or other options for the seller are much better than a bankruptcy.
Unfortunately – a bankruptcy attorney will rarely tell clients this! Most homeowners that consult only a bankruptcy attorney when looking for solutions to avoid foreclosure will end up concluding they have only one option – declaring bankruptcy and getting a foreclosure even though both might have been avoided.
Bankruptcy is a big decision. Before (or in conjunction with) exploring this option, make sure you talk to a creative real estate investing professional here at Real Property Hero about all of your options! Regardless of your situation, income, or equity, if you would like to discuss all of your options for selling your home quickly to avoid foreclosure.
Common Questions about Bankruptcy
Question: How and How Much?
Answer: Generally you consult with a Bankruptcy attorney and complete the paperwork and they file it with the courts. Attorneys charge different fees for this. We have seen this cost around $2000-$3000 for most people (for a fairly simple bankruptcy). Complex bankruptcies will cost more. This is a specialized area of law. We recommend for Texas the law firms of David J. Willis Attorney & Broker at LoneStarLandLaw.com, Timothy Webb-Bankruptcy Attorney at timothywebblaw.com, Doug Powell-Bankruptcy Attorney at dougpowelllaw.com, or the Law Offices of T. Alan Ceshker at Ceshker.com
Question: Does a Bankruptcy Stop Foreclosure?
Answer: Yes, but only temporarily. Bankruptcy delays a foreclosure until the lender files a motion to have the bankruptcy stay lifted. This almost always happens. During this delay, fees and missed payments pile up making foreclosure more likely and less preventable.
Question: Are there alternatives?
Answer: Yes. there are better alternatives, We’ve covered many options throughout this website.