Should you file for bankruptcy before or after a foreclosure?
Like most questions that involve the law, there’s no simple answer. Mostly, it depends on what you want to do with your home.
In order to make an informed choice, you need to understand how bankruptcy affects a foreclosure in the first place. That may help you decide how you want to proceed.
When you file for bankruptcy, something called an “automatic stay” is put in place. This halts all debt collection processes against you — even those involving lawsuits. The stay generally remains in place until your bankruptcy is discharged.
If you hope to keep your home, filing a Chapter 7 bankruptcy prior to foreclosure can give you the time to work out a new agreement with the bank, including the possibility of a loan modification. The bank may also be more willing to agree to a loan modification knowing that your other debts are wiped out. Debtors also sometimes file Chapter 13 bankruptcy in order to catch up on their missed mortgage payments and save their homes.
If you don’t want to hang onto your home — and there are many reasons that might be true — it’s often better to wait to file your bankruptcy until your home has been taken through foreclosure.
When you lose a home to foreclosure, the lender seeks to recover its losses by selling the property. It has to make enough on the sale, however, to cover your entire loan. If it doesn’t, the remainder due becomes your debt. Filing after the foreclosure allows you to put that remaining mortgage debt into the bankruptcy and have it discharged — so that you aren’t stuck with it hanging over your head.
This is a greatly simplified explanation of what can happen to your mortgage — and your mortgage debt — when you file bankruptcy. For specific advice that relates to your situation, it’s wisest to speak with an attorney. That way, you can discuss all the possible outcomes of your case and make the most informed decision.