Filing for bankruptcy to prevent foreclosure

Although Bankruptcy and foreclosure are two concerns that appear side by side in the financial lives of many people, it is important to remember that they are different issues.

Foreclosure can happen separately from bankruptcy, even though bankruptcy and foreclosure can be tied up with one another, as when a homeowner uses bankruptcy as a way to prevent or delay foreclosure. All that is required for foreclosure is to stop paying your mortgage payments.

Each state has its own foreclosure process. Some states go with a judicial, or court-based, process. Others use a more administrative process to handle foreclosure. In states that use a judicial process, the court will need to determine whether the lender has a valid complaint against the borrower before the lender may sell the property at a public auction. In a non-judicial foreclosure process, statutes govern foreclosure, so there is no going to court. In general, a lender will have to file notice of foreclosure with a local county recorder's office, and will only be able to have a public auction after an established time period.

For many people, bankruptcy and foreclosure are simultaneous concerns. Some people choose to file for bankruptcy in order to avoid foreclosure on their home. This works because bankruptcy puts an automatic stay on the foreclosure process, at least for a time. In Chapter 13 bankruptcy, the homeowner has the opportunity to keep their home if they are able to get current on their mortgage payments. In Chapter 7, a homeowner can delay the foreclosure process, but cannot cancel the foreclosure. There are several benefits to delaying the foreclosure in a Chapter 7 filing, but will not be able to keep their home.

Any large financial decision should not be taken lightly. Filing for bankruptcy can be a smart move for some people, but not for everybody.

Source: Fox Business, "Skip Bankruptcy with Foreclosure?," Justin Harelik, Sep 20, 2011.