Bankruptcy attorneys often advertise that filing bankruptcy can stop foreclosure. However, because of the self-serving interest bankruptcy attorneys have in the matter, it is understandable that consumers have difficulty trusting mere advertising. Now, a new paper from researchers at the University of North Carolina concludes that filing bankruptcy is, in fact, effective in avoiding a foreclosure sale.
The researchers analyzed 4,280 lower-income homeowners who were more than 90 days late on their 30-year fixed-rate mortgages. They found that when a homeowner in the midst of foreclosure filed for bankruptcy, a future foreclosure auction was 70% less likely to occur. While both Chapter 7 and Chapter 13 reduced the chances of a subsequent foreclosure auction, a homeowner who filed Chapter 13 was five times more likely to retain his home.
A copy of the paper can be found here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2344444
Filing bankruptcy immediately stops the foreclosure process by virtue of the automatic stay injunction. Bankruptcy debtors are given time to reorganize their finances and negotiate with their mortgage company for a resolution. If there is no agreement reached with the creditor, the homeowner has options, including:
- walking away from the home and surrendering the property back to the bank;
- stripping off an entirely unsecured junior mortgage;
- forcing the bank to accept payments over three to six years for any mortgage arrears; or
- entering a home modification program to reduce principal and/or interest.
Filing for federal bankruptcy protection shifts the balance of power away from the foreclosing creditor and places it into the hands of the consumer debtor. Throughout the bankruptcy process, the creditor must answer to the federal bankruptcy court and negotiate directly with the debtor’s attorney.
If you own a home that is in danger of foreclosure, speak with an experienced bankruptcy attorney and discuss your options. Bankruptcy is not always the best option for dealing with a home mortgage debt, but it can be an effective option when the bank is unwilling to work with you.