Most homeowners are very proud of their real property and are quite protective of it. Individuals who own their own homes may have saved aggressively for years to afford a mortgage and may have spent even longer paying down the principal balance on their mortgages. They may also have accrued sweat equity in a property by making repairs or improvements to it.
All of those investments could be at risk if the property owner falls behind on their mortgage payments. After multiple missed payments, homeowners are potentially at risk of foreclosure. Those concerned about future foreclosure proceedings may need to consider bankruptcy as a means of protecting their most valuable asset.
How does a personal bankruptcy filing help people who might be at risk of foreclosure?
By halting collection efforts
Depending on the type of bankruptcy an individual files, the process can take anywhere from a few months to multiple years. Filers typically need financial protection before they complete the bankruptcy process.
An automatic stay typically takes effect the same day an individual files for bankruptcy. The courts issue the stay when they notify the credit bureaus of the pending bankruptcy proceedings. Creditors then have to cease making collection calls or sending letters.
They also have to halt any pending legal proceedings. Bankruptcy can at least delay an upcoming foreclosure hearing and give the homeowner an opportunity to explore their other options.
By discharging debts
Regardless of what type of bankruptcy an individual files, they can potentially discharge some of their financial obligations. People cannot discharge a mortgage and retain the collateral property. However, they can eliminate credit card balances, medical debts and other financial obligations that prevent them from balancing their budgets every month.
A successful bankruptcy puts a filer in a better position to make their payments on time in the future. In a Chapter 13 case, the filer may be in a strong position to renegotiate the terms of their mortgage as part of the repayment plan. In a Chapter 7 filing, the rapid elimination of debts can give the filer an opportunity to catch up on what they owe quickly.
Taking action before a mortgage lender initiates foreclosure can help give a homeowner protection and access to more options. Personal bankruptcy can potentially protect homeowners who are on the cusp of foreclosure by reducing their financial strain and delaying impending collection efforts.