Bankruptcy or Foreclosure?

The choice between bankruptcy and a foreclosure is a difficult one for many people to make. This major financial decision will affect you for a long time, and you should realize that this isn't a case which should be made simply, nor is it necessarily a matter of choosing one over the other.

What Is Foreclosure?

A foreclosure occurs when a mortgage lender is not paid its monthly payments. You must pay the lender who is filing the action in order to prevent the action from going forward. These types of loans are like car loans, in which you would lose your car through repossession if you didn't pay your bills.

Like repossession, foreclosure will take away a person's home if they do not keep up with the monthly payments they owe on their mortgage.

What Is Bankruptcy?

In some cases, you might experience debt so large that you can no longer pay your debt, and in this case, a legal action of bankruptcy might be filed. Bankruptcy protects the filer by stopping all civil proceedings against them during the time the debtor is in bankruptcy.

The mortgage lender is required by law to halt their foreclosure actions. Once they are granted such relief, they will continue with their legal actions against the home buyer.

Essentially, bankruptcy will not stop foreclosure, and will not allow anyone to keep a home without paying the lender. The only thing that bankruptcy can do is slow down the inevitable process.

While bankruptcy doesn't stop foreclosure, it can give a person extra time to pay the lender, or make it easier to do so. Bankruptcy makes a mortgage lender pause in their foreclosure efforts, and a debtor has a little extra time to raise the money.

The debtor may also have have several of their other debts eliminated due to bankruptcy, so they are able to have additional money available to pay their mortgage.

Through a chapter 13 bankruptcy filing, the debtor is able to - through a court order - pay their mortgage catch up over a period of time rather than all at once.

What you must realize, of course, is that there are legal fees to pay for bankruptcy, and not everyone is eligible to file for bankruptcy in the first place.

In many cases, the legal bills may be more than the amount necessary to catch up on the mortgage payments that the debtor owes. Anyone considering bankruptcy to prevent foreclosure should discuss it with a lawyer. You will need legal help through your bankruptcy journey, as it is quite complicated by itself.

The material offered in this article should serve only as a general guide, and for more specific information, you should contact a licensed lawyer in your state.