Several years ago, I knew someone who had the choice of allowing their home to go through a foreclosure process, or filing for bankruptcy to save the home from foreclosure. The homeowner had attempted to negotiate with the mortgage company, with no success. The homeowner then tried to get refinancing for the property to get out of the current loan. Because of the state of the homeowner's credit, the refinancing was not obtained. After many weeks of trying to find other solutions, the homeowner thought that in order to save the home, filing bankruptcy was the only answer. Sometimes, all other ways of saving a property from foreclosure are exhausted, and only one other option is left; bankruptcy.
There are two types of personal bankruptcy available: Chapter 7 and Chapter 13. Keep in mind that if filing for bankruptcy is being considered, either chapter could have an upfront cost between $1000 and $5000. Once the filing has occurred, however, the foreclosure action is usually halted until a bankruptcy judge can rule on the case.
Chapter 7 bankruptcy erases all debts, including your current mortgage and any other loans you may have listed in your file. The drawback of erasing your mortgage is that it does not stop your lender from putting a lien on your house and foreclosing on the property. This means you can be out on the street without a house within weeks depending on your state's foreclosure laws. Before filing Chapter 7 bankruptcy, confirm what your state laws are for real estate property ownership to see if this type of filing is right for you.
Chapter 13 bankruptcy reorganizes your debt instead of wiping it out completely. You still have to pay off your debts but you will have three to five years to do so in most states. All debts noted are included in the reorganization, including your mortgage payment. This will give you an extended period to pay off those mortgage payments and accompanying fees you missed, as well as other debts. Chapter 13 allows you to continue to stay in your home under a new mortgage payment schedule.
Do not try to file for bankruptcy without a lawyer. The forms you get from the various legal Internet sites are not adequate to cover all aspects of your bankruptcy. Be wary of on-line and off-line advertised services claiming that they will file the bankruptcy papers for you for a reduced fee. If something is missed, they will not be able to represent you in court.
If you qualify, you may be able to get a reduced fee or even free legal counsel from Legal Aid or other not-for-profit organizations in your community. Also, check with your local Bar Association and ask about attorneys that will work "pro-bono"(free), or at a reduced rate for clients in true financial distress. Remember, your finances will be exposed to the bankruptcy court and all involved with your case. Do not expect to get something for nothing--in this case, free legal advice--unless you are in a truly desperate situation.
No one wants to go through foreclosure or bankruptcy proceedings. Hopefully, these situations can be avoided with the right advice and a little planning ahead.
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