Bankruptcy can be one of the options to avoid foreclosure. This can give you a little break in all the chaos you are having with your home mortgage. But this should only be tried as a last resort because it can also damage your credit rating.
This is advisable for “non-judicial” states like Texas where the foreclosure process is fast and negotiations with lenders are hard to establish.
Once you file for bankruptcy, your lenders must stop all collections as well as the entire foreclosure proceeding. This is why it is a good option to avoid foreclosure.
Based on the law revisions of October 2005, before filing for bankruptcy, the homeowner will be asked to have credit counseling from a U.S. Trustee Program-approved non profit agency. The 90-minute counseling tackles financial evaluation, your budget plan and possible alternatives. It may cost you $50, but it can be waived if you really cannot afford it.
There are 2 types of bankruptcy you can choose from:
CHAPTER 7
- Involves the complete liquidation of property to settle the debts and avoid foreclosure.
- For those under the median income group because it can use all available assets to pay for delinquencies.
- An automatic cancellation of all debts may occur
- For those who cannot avoid foreclosure anymore and would just give up their home
- For those who have limited assets and income but has unlimited debts.
CHAPTER 13
- Involves a repayment plan that demonstrates on how the borrower will resolve the problem. A repayment plan keeps the creditors away and helps avoid foreclosure.
- For the borrowers who can afford to pay a minimum of $100 every month for at least 3 to 5 years.
- Saves many of the borrower’s property but it may be difficult to accomplish. Only 1/3 of the cases that choose this option complete it.
- The borrower has to pay for the whole debt plus other extra payments.
But before you consider bankruptcy, ask your lawyer about it. You must also know that there are existing repayment plans that do not require bankruptcy filing and yet can also help you avoid foreclosure.
Another important point you must know is that bankruptcy can ruin credit standing. Though foreclosure can also damage your credit standing, it only involves your mortgage. Bankruptcy can involve other accounts. But this damage only remains in the credit report for 7 years. Eventually, your scores will improve after some time.
To avoid foreclosure, a lot of homeowners find themselves making desperate decisions, so a lot of thinking must be done.