How Bankruptcy Can Help With Foreclosure

Bankruptcy and foreclosure are linked because one often involves the other. In fact, an impending foreclosure is one of the main reasons why individuals choose to file for bankruptcy - a process that liquidates your debts or allows you to reorganize and pay them off, depending on your preferences, your circumstances, and your income.

Certain types of bankruptcy can help with foreclosure by preventing it from happening or indirectly resulting in a loan modification - which both postpone foreclosure or avoid it entirely. Chapter 7 bankruptcy is the most common type of bankruptcy for an individual in the United States. It is a process by which assets are liquidated and used to pay off existing debts that are unsecured. Secured debts, like a mortgage loan, are satisfied by the trustee who uses the property securing the debt - i.e. the home - to meet the obligation.

Normally, Chapter 7 bankruptcy does not allow you to keep your home. Only certain assets, like household goods and personal possessions, are exempt. Since a mortgage is a secured debt, the secured property must go. The only way to avoid this with a Chapter 7 is to sign a reaffirmation agreement that says you will continue to pay off the debt on the home loan. This must be approved by courts, which can grant this motion but can also prevent it from occurring. Of course, if a lender knows you are facing bankruptcy, they may be more likely to work out a loan modification with you so they can avoid the cost and hassle of a foreclosure auction.

With Chapter 13 bankruptcy, you can work out a repayment plan as a part of your overall credit rehabilitation plan as ordered by the court. The repayment plan for the mortgage allows you to keep your home as long as you may timely and regular payments on the amount owed. It is the most popular way bankruptcy is used for preventing foreclosure, although as with Chapter 7 bankruptcy, many lenders will refuse to do a loan modification with you if you are covered by bankruptcy.

The court can also impose term modifications on your mortgage loan, which helps you to be better able to repay the loan once you are no longer covered by bankruptcy. This can help prevent foreclosure later on.