Filing for Bankruptcy

• Bankruptcy is also a legal action. The debtor must file for bankruptcy protection with the United States Bankruptcy Court and accept the court's decisions. A bankruptcy creates a bankruptcy estate that is managed by a trustee appointed by the court. There are two main types of personal bankruptcy, Chapter 7 and Chapter 13. Chapter 7 bankruptcies immediately sell assets owned by the debtor to pay for the most serious debts and cancels remaining debts. Chapter 13 bankruptcy creates a payment plan that debtors must follow for 3 to 5 years (no more than 60 months), but allows them to retain more assets. Both forms can help halt a foreclosure.
  
  

Stays

• For the courts, both a foreclosure and a bankruptcy by the debtor mean that there are two different legal actions taking place. Legally, the bankruptcy has the priority, which is why many debtors use it as a last chance effort to prevent the foreclosure. The act of filing for bankruptcy creates an automatic stay, or a freezing of the foreclosure process. This means that if the foreclosure is still ongoing, the debtor can stop it by filing for bankruptcy. The foreclosure will then be halted until the bankruptcy proceedings are complete.
  
  

Bankruptcy Effects

• Bankruptcy has serious effects on credit ratings, and may not always be the best choice for a debtor looking to stop a foreclosure. The bankruptcy will lower credit scores and make getting another loan very difficult. Also, the court may decide that the debtor needs to pay the delinquent payments anyway. Some states may allow the bankruptcy estate to eliminate the equity or value of the home, which means that the debtor will have no way to create a second mortgage or refinance.
  
  

Considerations

• Creditors faced with a bankruptcy realize that it may be years before they recover the loss from the defaulted mortgage, if they recover it at all. To combat the mortgage, they will file a plea at the bankruptcy asking the court to remove the stay and allow them to continue pursuing the foreclosure. The decision is up to the court, but if the debtor has little chance of keeping the property or making future mortgage payments, the court may allow the foreclosure to proceed.