When faced with foreclosure, some homeowners get affected emotionally and this leads to irrational decisions as to the timing of bankruptcy filing. Knowing when to file for bankruptcy can change the game plan for you. In some scenarios, filing for bankruptcy before foreclosure, is recommended while in others, filing for bankruptcy after the foreclosure is complete can be the best option for you. Knowing the pros and cons of each approach can be an eye opener and certainly an advantage to you.
Understanding Bankruptcy Discharge and Automatic Stay
An automatic stay immediately goes into effect the moment you file for bankruptcy. The stay freezes any collection activities that may be initiated by your creditors against you. During this period, the creditors cannot take your property or money and any law suits are paused.
When at the conclusion of your case, a discharge is entered by the court, the stay is then removed and any lenders whose debts weren’t wiped out by the bankruptcy can restart the collection process. It is important to know that bankruptcy does not eliminate all debts, but can take off quite a huge chunk. Luckily, deficiency is among the debts bankruptcy discharges.
Scenario 1 – Filing for Bankruptcy before Foreclosure
Before foreclosure, you can file for bankruptcy and this has its unique advantages. Below are some of the situations when you should consider this option.
Loan Modification Purposes
Quite a number of clients in foreclosure want to strike loan modification agreements with their banks. If you happen to file for bankruptcy during the early stages of the foreclosure process, the foreclosure sale will be temporarily stopped by the automatic stay.
When the bankruptcy case is concluded and the court wipes out your debts, the foreclosure will then resume, but at this point, you will have ample time to negotiate with your bank for a loan modification before the foreclosure process is complete. The advantage of filing for bankruptcy early enough is that some of your debts will be discharged and this means chances of your bank approving the loan modification are high.
Relief and Peace of Mind
In case you are not interested in keeping your home, filing for bankruptcy before foreclosure sale will remove the lingering deficiency balance and this means you won’t need to worry about it once the foreclosure goes through. Even if your attempts at loan modification do not succeed, you are free to proceed with life knowing that there is nothing you owe.
More Time to Spend in Your Home
Filing for bankruptcy before a foreclosure sale brings into effect an automatic stay which prevents the progression of the sale process. This effectively lengthens the time the lender will take to sell off your house and certainly give you more time to organize yourself and spend in your house.
Chapter 13 Bankruptcy
This enables you to have an arrangement with your creditors where you remit periodic payments to them over duration of 3 to 5 years. In exchange, you keep the property. The advantage of Chapter 13 bankruptcy is that it gives you the opportunity to re-service your mortgage on a new repayment plan. This is an opportunity you will not have had if you had filed for bankruptcy after the foreclosure sale.
Scenario 2 – Filing for Bankruptcy after Foreclosure
On the flipside, it may also be advantageous for you depending on your unique situations to file for bankruptcy after the foreclosure sale goes through. Below are some of the situations where adopting this approach is recommended.
Condominium or Homeowner’s Association Dues Payment
If your condominium or Homeowner’s Association dues are assessed prior to filing for bankruptcy, you are not liable for payment. This means filing for bankruptcy after the foreclosure process is complete puts you in a safe position with regard to the payment of dues assessed after the filing. This is because the property does not any longer appear in your name. The dues assessed before you file will be effectively discharged.
Filing for Bankruptcy to Avoid a Deficiency
If your motivation for filing for bankruptcy is mainly to get away from your mortgage deficiency, filing before the foreclosure sale may not be helpful to you. Inasmuch as the bankruptcy discharges your liability to mortgage deficiency, there are situations where you may still avoid deficiency liability without bankruptcy.
For instance, some state laws bar mortgage lenders from initiating legal charges against previous homeowners for deficiencies on specific types of loans. You may also benefit from waiver of deficiency particularly if you have an attorney fighting for foreclosure or you lodge a short sale application.
Foreclosure is certainly not a situation anyone would want to be in. In certain cases a short-term solution like a payday loan can help obtain financial relief and avoid default without necessarily enlarging your debt cycle. Payday loans by their very nature ought to be paid within a short duration and this can tremendously boost your credit score thus putting you in a better position when negotiating loan modifications.