When the bank is foreclosing on your house, one of the options which may have passed through your mind is declaring bankruptcy. Bankruptcy is a social taboo, but it does dissolve many of your debts, which can create a fresh start for a person who is falling into a hopeless spiral of debt.
Before you rush into declaring bankruptcy though, you should consider the details of how it may affect your situation—which can vary by state and also depend on the type of bankruptcy which you file.
When you declare bankruptcy, the court will stop your creditors from attempting to seize what you owe them. That includes your house, so foreclosure proceedings will immediately be halted. At this point the court will have to make a decision about what to do with your situation and how to most effectively discharge your existing debts.
When you file for personal bankruptcy, you can choose between either Chapter 13 or Chapter 7 bankruptcy. If you go with chapter 13 bankruptcy, your debt to the mortgage company will still exist. You will be able to go on a payment plan to finish discharging your debt yourself.
With chapter 7 bankruptcy, most of your debts will be discharged, including your mortgage. But that means in many cases that your home will then be forfeit as collateral. While you won’t owe on the house anymore, you may still lose it. Whether you can stay in the home or not depends on what state you live in and what your specific situation is.
The court may order your home to be sold, and then pay off your mortgage company and your other lenders with the proceeds from the sale.
In some cases though, you may reach an agreement with the lender to stay in the house and keep paying, particularly if the discharge of your other debts has given you the ability to continue paying your mortgage in full and on time. In this case, you may be able to save your home after all. This could make bankruptcy a great decision for some people in some scenarios.
when you go into bankruptcy, everyone in the world isn’t going to know about it unless you tell them. So don’t decide against it on the principle of social humiliation.
Also, don’t be concerned that you’ll lose all your possessions. As mentioned before, your home may or may not be forfeit, but in many states your assets may be protected. So check your state laws before you give up on the idea. Will bankruptcy destroy your credit? Yes, it will. But will it be permanent? Not necessarily. Discharging your debts may give you the ability to start rebuilding your credit from the ground up.
Then instead of slowly losing credit, you’ll be slowly fixing your credit and working toward financial recovery.
Bankruptcy is right for some people and wrong for others; so figure out all the details of your case, seek legal counsel, and make an informed decision.