Is Bankruptcy Worse than Foreclosure?

Given the recent sub-prime home loan disaster, and resulting housing market crash, more and more people are faced with the unfortunate reality of foreclosure. Some homeowners are staving off a foreclosure by filing for protection from the bankruptcy court.

While bankruptcy certainly has it’s negatives, it provides a legal way for homeowners to stop a foreclosure, buy some time, and figure out options to use bankruptcy to keep the house and modify a loan.

Stopping Foreclosure

When a debtor files for bankruptcy, he or she is automatically protected from creditor collection attempts by the automatic stay. This stops all collection efforts, including a foreclosure proceeding, and allows the debtor time to work out payment plan, or liquidation plan.

Keeping the House

At the very least, the homeowner will get some time to figure out whether or no he or she can actually afford to keep the home. If the situation warrants it, it may be possible, by erasing credit card debt, medical bills, personal loans and other dischargeable debts, to catch up on late mortgage payments and keep their house.

Loan Modification

If the home loan is simply too unrealistic for the debtor to afford, then his or her bankruptcy attorney may be able to use the bankruptcy process to force the lender to modify the loan to something more affordable. While in many situations, lenders are reluctant to allow a loan modification, during bankruptcy and with the aide of an attorney, the homeowner may be able to get it done.

Recent Legislation Attempts

More and more bankruptcy judges are trying to get the ability to “strip off” the upside-down” portion of a home loan and discharge it. Currently, the law does not allow it, but recent efforts may change that very soon. Even some banks are realizing that allowing the bank to remove some principle of a home loan may be better for them than simply foreclosing or forcing a short sale.

Get Qualified Legal Advice

With the complexities of bankruptcy laws, and recent efforts to get new legislation passed, it is very important that a home owner considering bankruptcy protection first discuss their case with an experienced attorney.

Bankruptcy may be a good option for homeowners behind on their mortgage payments, or even facing a foreclosure, but it’s important to discuss it with a professional first.