Personal Bankruptcy vs Foreclosure

Many people having a difficult time paying their bills, especially their monthly mortgage payment, begin to think in terms of bankruptcy vs foreclosure. Which action should they take?

Actually, it is not really their choice. Personal bankruptcy and foreclosure are two different legal actions even though they can affect each other.

A foreclosure is a legal action filed by a mortgage lender when it is not paid its monthly mortgage payments. Basically, the lender wants the house, which secures the mortgage loan, to be sold at public auction so that it can recover the money that it loaned the borrower. The only way to stop a foreclosure action is to pay the mortgage lender, but personal bankruptcy can affect a foreclosure action.

Personal bankruptcy is a legal action filed by individuals seeking court protection from their creditors. People generally file either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

An important aspect of every bankruptcy, regardless of type, is what is known as the "automatic stay". By law, most civil legal actions, such as foreclosure, must stop when a bankruptcy is filed. Therefore, a mortgage lender has to suspend its' foreclosure action. A mortgage lender can file for relief from the automatic stay, and when the relief is granted, simply proceed with the foreclosure action.

In most cases, the initial way that foreclosure and bankruptcy interact is that a home lender will either threaten to or actually file a foreclosure action. The borrower then files either a Chapter 7 or a Chapter 13 bankruptcy. Then the automatic stay kicks in and the lender has to suspend its' foreclosure. If the lender is not then paid, it will file for the automatic stay to be lifted (ended) and proceed with foreclosure. The borrower has benefited by delaying the foreclosure and gaining time to work through the problem.

There is an even greater interaction between a Chapter 13 bankruptcy and foreclosure. Generally, people will fall several months behind on their mortgage payments and the lender demands a lump sum payment of the arrearage. Under Chapter 13, a person can actually pay the arrearage amount over a period of time and the foreclosure is suspended while the payments are being paid. A lenders can object to the amount that it is being paid each month toward the arrearage, but if the bankruptcy court approves the payment plan, the lender cannot do anything, but accept the money.

One draw back with personal bankruptcy is that people must qualify, and not everyone qualifies.

This article is general information. If you have any questions of any nature about bankruptcy or foreclosure, talk with a lawyer licensed in your state.

For more general information, see Bankruptcy. For more detailed information see bankruptcy information.

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