Foreclosure proceedings can lead to involuntary removal from a residence. People lose their homes and any money they invested in the property. They also have the record of their foreclosure on their credit report for years, which can make securing a new mortgage or even a rental property much more difficult.
People who have missed multiple mortgage payments and who worry about possible foreclosure may choose to file for personal bankruptcy to prevent the foreclosure. How does bankruptcy protect people who are at risk of losing their homes to foreclosure?
1. Pausing collection efforts
Creditors usually need to cease collection efforts while there is a bankruptcy case underway. The courts grant an automatic stay that prevents creditors from taking legal action or continuing collection efforts while the bankruptcy is still in progress.
2. Facilitating a modification
Mortgage lenders may be more cooperative in cases where borrowers have a pending bankruptcy underway. Foreclosure can be a costly process for a lender, and working with a homeowner to modify their mortgage may be a better solution. Especially if a filer pursues Chapter 13 bankruptcy, lenders have an incentive to work with the filer instead of taking aggressive collection action against them.
3. Eliminating financial pressure
People may fall behind on their mortgages because they have other debts that feel more pressing. The discharge provided at the end of the bankruptcy process can make it easier for people to balance their budgets and afford their mortgage every month.
Anyone who has missed two or more mortgage payments could be at risk of foreclosure. Discussing the possibility of a personal bankruptcy with an attorney could help homeowners determine if bankruptcy is an appropriate solution.
