People who are having problems making their mortgage payments and facing a financial crisis are often faced with a dilemma about what to give up. Sometimes, the idea of letting go of your home can be devastating, especially if you and your family have already invested a lot of money, time and effort into it. With so many memories you need to leave behind, it may seem difficult to face the future without looking back with some reservations. If you are facing foreclosure, you may be wondering if filing for bankruptcy can offer you reprieve from the consequences of a foreclosure or better yet, stop it. So does bankruptcy stop foreclosure and is it possible to use bankruptcy to avoid foreclosure?
Bankruptcy vs. Foreclosure
If you fail to make your mortgage payments, you may be in danger of foreclosure and lose your home. Foreclosure proceedings usually begin once the homeowner fails several times to pay the mortgage. If your finances have been hit this hard and there are no other options left for you to turn to, you may even consider filing for bankruptcy. Both bankruptcy and foreclosure are legal actions that you turn to as a way to protect whatever assets you have left and stop any lawsuits from creditors and collection efforts from collectors. But will bankruptcy stop foreclosure?
The Automatic Stay
Whether you are filing a Chapter 7 or a Chapter 13 bankruptcy, you can expect the court to issue an order for relief for you. This order is issued automatically and there is no need to request for it. The order comes with an automatic stay, which instructs creditors to stop collection activities right away. As to the question that states, “Can bankruptcy stop foreclosure?” the answer is no but it will extend the time until the property is finally foreclosed. Once the order for relief is issued, the foreclosure process may be postponed. For example, if your home has been included in a foreclosure sale, it can be postponed for about 2 to 4 months while your bankruptcy filing is pending.
Of course, this will depend on certain factors. If your lender is granted permission by the bankruptcy court that allows the sale of your house, you may get less than 3 or 4 months temporary stay. Regardless, filing for bankruptcy will help delay the foreclosure process.
Why Neither Bankruptcy nor Foreclosure Will Work For You
Most homeowners are concerned about how their legal action pertaining to their finances will affect their credit score. Both bankruptcy and foreclosure will but there are a few differences. If you allow your property to become foreclosed, you will have to face a 7-year statute of limitations but your credit score will have to suffer doubly, which means you will have negative figures on your legal entry and your trade line. This will make it very difficult for you to take out a mortgage loan down the line, even after your credit has improved. A foreclosure, quite simply, is a red flag to the creditor, who will be very wary about granting you a home loan.
If you file for bankruptcy, the entry will stay in your report for 10 years. Your credit score will take a hit but once that’s done and you are able to rebuild your credit, your score will do okay. Since no further actions will be taken against you by your creditors, your credit score will not suffer further. However, what if you do not want to take chances and prefer to protect your credit score? Consider looking for other options that will allow you to avoid a foreclosure. Some of these include:
Loan Modification– a process whereby the lender changes the terms of the loan to make payments more affordable for the borrower. Changes may be imposed on the term, the loan balance and the interest rate.
Short Sale – many times the lender agrees for the homeowner to sell their property for less than what is still owed. Most of the times the lender will forgive the deficiency and the credit score will not be hurt.
Lease Option – allows the homeowner to lease the property to a tenant who will be given the option to buy it at the end of the contract.
Deed in Lieu of Foreclosure – allows the homeowner to avoid a foreclosure by handing the property back to the lender. Instead of using bankruptcy to stop foreclosure, homeowners can take charge of the situation and walk away from a financial burden with their credit score intact.
Faced with foreclosure and on the brink of bankruptcy, many homeowners feel at a loss about what to do and where to go. If you feel unsure about handling the transition of your property on your own, working with a real estate investor will give you the confidence you need so you can use the best option available for you. Keep in mind that an informed decision is a better decision.