Foreclosure proceedings can have catastrophic consequences for homeowners. Obviously, they lose their primary residence when the lender reclaims it as collateral for the mortgage. The foreclosure process results in a total loss of accumulated equity as well, which can drastically alter an individual’s personal wealth.
The record of the foreclosure may limit not just the future borrowing capabilities of people who want to buy a home again but also their rental opportunities. Homeowners who have missed payments may want to take prompt action to prevent foreclosure.
Filing for personal bankruptcy is often one of the best options available for struggling homeowners who want to prevent a potential foreclosure. How can a personal bankruptcy filing help people who have fallen behind on their mortgage payments?
1. Delaying foreclosure efforts
When people file for bankruptcy, the courts grant relief from collection efforts in the form of an automatic stay. Creditors and lenders typically have to halt all collection activity until the courts resolve the bankruptcy case. A timely bankruptcy can prevent a lender from filing foreclosure paperwork with the courts or can lead to the dismissal of a scheduled hearing. Temporarily stopping collection efforts can give people time to create effective plans.
2. Facilitating mortgage modifications
Lenders who are aware of pending bankruptcy proceedings may more readily work with borrowers. Foreclosure is a costly process, and lenders can lose money if they have to regain possession of a home and then sell it. They may agree to modify the mortgage to keep the current owner at the property and make the payments more manageable. Particularly when people file for Chapter 13 bankruptcy, lenders may become more open to discussions about loan modification.
3. Reducing budgetary pressure
The completion of a successful bankruptcy filing results in a discharge of eligible debts. People can eliminate the legal responsibility to pay credit card balances, medical bills and various other unsecured financial obligations. Doing so can take pressure off their household budget. It may be much easier to make a mortgage payment on time every month when there aren’t other debts burning through the household’s income.
Choosing to file bankruptcy promptly when faced with the threat of foreclosure could make a major difference for struggling homeowners. A successful personal bankruptcy could prevent foreclosure and lead to better financial circumstances for a filer.