Bankruptcy and Foreclosure

In all but a small fraction of situations, bankruptcy can and will help stressed homeowners in several ways.

For example, one type of bankruptcy, a Chapter 13, can make it possible for homeowners who are several months or more behind on their mortgages to keep their homes by resuming the regular monthly mortgage payment and making a small additional payment to "catch-up" the unpaid balance over a five year period. This is possible because bankruptcy reduces the amounts a homeowner is required to pay on other, usually unsecured debts (credit cards, medical bills, loan company accounts, some taxes). Typically, those other debt balances can be reduced by up to 95%.

A Chapter 13 bankruptcy can also allow homeowners who are struggling with a home equity loan or second mortgage to substantially reduce the monthly note payment. Imagine reducing a $250.00 per month home equity line payment to $25 per month and paying it off completely in five years.

Alternatively, a Chapter 7 bankruptcy can simply "wipe out" all unsecured debts, making it possible for a homeowner, who is current or only slightly behind on a mortgage, to keep the home.

If a homeowner simply cannot afford or does not want, to keep the home, bankruptcy allows the owner to surrender the home to the lender without danger of a "deficiency" judgment. That means if the home goes into foreclosure and is sold for less than the balance of the mortgage, the homeowner is not required to pay the difference. Bankruptcy eliminates the danger of a deficiency judgment, unlike a so-called "short sale" or "deed in lieu of foreclosure."