Bankruptcy as a Means to Stay in Your Home, Despite Mortgage Problems

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In these tough economic times even homeowners with steady incomes can find themselves facing foreclosure. In this situation, filing for bankruptcy is an option to consider closely.

Options for Homeowners Behind on the Mortgage

The option you choose will depend on your unique circumstances. But for a homeowner behind on the mortgage, the following options may be available:

  • Forbearance: Some lenders are willing to agree to a fixed period during which no mortgage payments are made.
  • Loan modification: A lender can lower the interest rate, monthly payment or principle balance; a lender can also increase the length of the repayment term.
  • Short sale: A lender agrees to allow the home to be sold for less than is owed.
  • “Deed in lieu”: The borrower gives the home’s deed to the lender and walks away.

When all else fails, bankruptcy may be the answer to avoid the devastating effects of foreclosure.

Bankruptcy Can Help Avoid Foreclosure

Filing for bankruptcy gives a borrower time to sort out their finances and may not negatively impact credit as much as a foreclosure.

Upon filing for bankruptcy, a court automatically issues a stay of the foreclosure proceedings. This will postpone a foreclosure sale for three to four months, unless the lender files a motion to lift the stay or the clock has started ticking on an advance notice. Although bankruptcy will not necessarily keep a homeowner in the home, it provides time to get back on track.

Longer term, bankruptcy provides better options for home ownership. A borrower is ineligible for a Fannie Mae or Freddie Mac mortgage for seven years after a foreclosure. The wait time is only four years after a bankruptcy filing. However, a borrower can qualify for an FHA-backed mortgage three years after a foreclosure and two years after a bankruptcy.

Bankruptcy Options

There are two types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy discharges nearly all debt within six months and is appropriate for those with low income and few assets. Chapter 13 bankruptcy consolidates debts and works out a three-to-five year repayment plan. Chapter 13 is often preferable because it allows a borrower to keep their home and some other assets.

While bankruptcy should not be the first choice when facing foreclosure, it is often preferable to foreclosure’s long-term consequences. If you have exhausted all other remedies to avoid foreclosure, contact a Florida bankruptcy attorney at our firm to discuss your options.

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