Which Is Better, Foreclosure or Bankruptcy?
When debtors are faced with foreclosure, many switch to panic mode and immediately file for bankruptcy protection, thinking that it will stop the foreclosure process. This is true, depending on the type of bankruptcy they file for. Chapter 7 bankruptcy protection eliminates unsecured consumer debt, such as credit card debt, that the debtor can no longer afford. Chapter 7 does not eliminate secured debt, such as mortgage debt. This means that Chapter 7 is useless when it comes to halting foreclosure. Chapter 13 does halt the foreclosure process, however, because Chapter 13 organizes a repayment plan that the debtor promises to stick to.
There are some advantages to filing for Chapter 7 over Chapter 13, however. When it comes to choosing between bankruptcy and the lender foreclosing on the debtor's home, for the purpose of buying another home in the future, bankruptcy is the lesser of the two, according to most mortgage professionals. It all depends on the specific situation of the debtor, and the circumstances that dictate what choices they have. For instance, in Chapter 7 the debtor will have some personal property like expensive jewelry and family heirlooms seized for money to repay the creditors.
Expensive jewelry and family heirlooms count as non-exempt assets, so the court can seize them, sell them and use the money to repay creditors. Chapter 7 is down and dirty in that it seizes non-exempt property to repay creditors as much as the debtor's estate will allow. If the debtor is faced with foreclosure on their home, the key thing to remember is that the debtor can stop it if they file for Chapter 13. A successful Chapter 13 petition rests on the ability of the debtor to repay their creditors; Chapter 13 allows them to restructure their repayment schedule.
If the debtor does not have the money to repay their creditors, even if they restructure their debts, they have no choice but to file for Chapter 7. Chapter 7 does not halt the foreclosure process completely, but it does slow it down somewhat. Even if the bankruptcy court grants a mortgage lenders' petition to have the automatic stay, applied to all debt collection attempts, remove immediately, the debtor still has some time. Depending on the state in which the debtor lives, the foreclosure process can take as long as a year, if the state requires mortgage lenders to go to court to begin the foreclosure process. If the state allows mortgage lenders to begin the foreclosure process on their own, foreclosure can take a matter of weeks.
Debtors must remember that bankruptcy looks much better to lenders than foreclosure. The more debtors make lenders repossess their homes, the less favorably they look upon them. This means that it is in the best interest of debtors to file for bankruptcy rather than submit to the foreclosure of their home. Even if they cannot stop the foreclosure process from happening, in states that required lenders to go to court to begin foreclosing, they still have time to save money for a down payment or as a security deposit for a renting situation.
