Sunday May 21, 2017

Chapter 7 or 13 Bankruptcy?

Declaring bankruptcy is a drastic action, but it is sometimes a viable one when your bank puts you into foreclosure.  While there is a strong social stigma associated with bankruptcy, the reality is that not a lot of people are going to know you declare it unless you tell them.

The type of bankruptcy which you declare will have an impact on what will happen with your mortgage though, and the implications also diverge based on where you live.  So you’ve got some research to do before you make a decision.

Chapter 13 and Chapter 7 bankruptcy are the two types you are allowed to pick from when you file for personal bankruptcy.

When you file for bankruptcy of either type, the court will issue an order which goes out to all your creditors, preventing them from collecting on your debts until the court itself can rule on your case.

For a chapter 13 bankruptcy the balance you owe your lender on your home won’t be dissolved.  The benefit to you is that you should be allowed to go on a payment plan in order to finish paying off the loan on your home.  For many people this is enough to solve the problem of foreclosure. 

A chapter 7 bankruptcy will discharge the majority of your debts.  Among the debts which are discharged during a chapter 7 bankruptcy is your mortgage—but that doesn’t mean that you will own the home, naturally, and since your home is listed as the collateral on your mortgage, foreclosure proceedings may resume.

The court itself may sell your home in order to get money to pay back your mortgage lender and other creditors. 

Does that mean chapter 7 bankruptcy will spell doom for your situation?

Not necessarily. Many times discharging your other debts gives you the financial freedom to return to paying your mortgage on full and on time each month.  In this case, your lender may decide it is to their advantage to let you keep the home and continue to pay them.

Bankruptcy will cripple your credit score, but by getting rid of your debts you may have a chance to rebuild from scratch, and movement will then be in a gradual positive direction instead of in a gradual negative direction.

Hitting rock bottom is difficult, but at least things can only theoretically improve from there.  So does this mean you should declare bankruptcy?  It’s typically a last resort, and you also will need to look into state laws to learn how specifics may affect your situation.

You should get in touch with a lawyer too; handling bankruptcy on your own is risky.  A lawyer can assist you in making the most beneficial move—whether that’s filing for bankruptcy or not.

It may be better for you to go into foreclosure or short sell the home.  Or perhaps you won’t need to do any of those things.

Sometimes you can renegotiate a mortgage instead, and avoid any of these unpleasant maneuvers!

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