For those homeowners staring down the barrel of a foreclosure, filing for bankruptcy may be a tempting fix. But, tempting as it may be, those considering bankruptcy as a means to thwart foreclosure should strongly consider otherwise.
Just a little cursory overview of bankruptcy – the Bankruptcy Code is housed within Title 11 of the United States Code, making it federal law (which supersedes state laws like those governing foreclosures). It’s broken into a series of Chapters, with the following Chapters applicable to specific types of debtors and their specific needs:
Chapter 7: General Liquidation – full discharge of debt
Chapter 9: Reorganization of Municipalities
Chapter 11: Reorganization or Orderly Liquidation – primarily of businesses or those with complicated financial structures (no debt limits)
Chapter 12: Family Farmers and Fishermen Reorganization Plans
Chapter 13: Wage-Earner Reorganization Plans (debt limits)
The filing of a bankruptcy petition is self-executing, which means the filing alone operates as an automatic stay on foreclosure proceedings.
Given bankruptcy’s preemptive nature, many homeowners make the mistake of using it for the sole purpose of stopping a foreclosure. The reality is that filing for bankruptcy won’t stop a foreclosure – it only delays it. In fact, once a bankruptcy is filed, most creditors will simply enter the bankruptcy proceeding and seek relief from the automatic stay to protect their investment; and when this relief is granted (a likely outcome), the creditor will proceed with the foreclosure action. More importantly, while filing bankruptcy may extinguish any personal liability for the delinquencies giving rise to the foreclosure, it will not prevent the foreclosure itself unless those delinquencies are cured.
Bankruptcy is an extreme measure and should be pursued only as a last resort. It doesn’t take a butcher knife to slice an apple. The reality is that, unless you’re buried in debt, there may be more effective and less drastic alternatives for you.
Working with an experienced real estate attorney who can assess your needs, determine the optimal solution for you, and help get you back on track is one of the most economically prudent decisions you can make.