Bankruptcy and foreclosure: Either of them alone is enough to make most people run, but dealing with both together? A nightmare, right?
Actually, bankruptcy might just save you in foreclosure. Admittedly, it's not the way people hope to be saved from foreclosure. But filing for bankruptcy can help you save your house if it's in the process of foreclosure or about to be.
Both foreclosure and bankruptcy come about as a result of significant debt, and neither should be taken lightly. But choosing bankruptcy can have some significant benefits.
Saving Your Home
There are several kinds of bankruptcy, but Chapter 13 allows you to work with creditors to create a payment plan. That plan is designed to get you back on track with your debts within a few years.
If your mortgage company agrees, then Chapter 13 will allow you to avoid foreclosure even if you are behind on your payments or can't pay the full bill right now.
The catch is that you do need to have enough cash to make monthly payments on time during the repayment plan. If you can't pay, then you may have to convert to a Chapter 7 bankruptcy, which would mean losing the house.
Protecting Your Credit
Both foreclosure and bankruptcy will do a number on your credit score, but it turns out bankruptcy is generally kinder to you in the long run.
To bounce back, you have to start rebuilding your credit. That's hard to do after foreclosure because it's hard to get anyone to lend to you. Credit card companies generally don't want to take the risk.
But for people who declared bankruptcy, credit card offers start rolling in usually a year or two after the bankruptcy is complete. That means you can start rebuilding sooner.
Buying Some Time
Even if you aren't able to save your home, filing for bankruptcy puts a hold on any collections actions that are ongoing. That includes your foreclosure.
If nothing else, it gives you some breathing room to sort things out without creditors breathing down your neck. Maybe something will come up to let you save the house and maybe not; but at least you get some space to breathe.
When filing for bankruptcy, it's beneficial to hire an attorney which also puts it a step above foreclosure. It's still debt, but at least you have someone to guide you through it.
- Chapter 13 vs. Chapter 7 Bankruptcy (FindLaw)
- Rebuilding Credit: Getting a Mortgage after Bankruptcy (FindLaw's KnowledgeBase)
- 3 Ways You Can Stop a Foreclosure (FindLaw's Law and Daily Life)
- Get Affordable Access to an On-Call Attorney With a Legal Plan From LegalStreet (LegalStreet.com)
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