How does bankruptcy stop foreclosure?

On Behalf of | Mar 14, 2023 | Chapter 13 Bankruptcy

Filing for personal bankruptcy is often the last option that anyone wants to consider, but certain circumstances may understandably inspire people to file. One of the most common concerns that leads to personal bankruptcy involves a homeowner falling behind on their mortgage and worrying about the risk of foreclosure. After years of investing in a home, people will often take any steps they can to protect their residence.

Personal bankruptcy, particularly Chapter 13 bankruptcy, can be a viable means of protecting someone’s interest in their residence during times of financial hardship. How can bankruptcy help?

Stopping collection activity

The first form of protection someone receives from bankruptcy is the automatic stay that prevents collection activity. After filing for bankruptcy, people shouldn’t have to worry about receiving collection calls or getting served with a debt-related lawsuit.

Any pending lawsuits, including foreclosure proceedings, will typically end up temporarily dismissed until the courts resolve the bankruptcy filing. The automatic stay doesn’t prevent all future collection efforts, but it can give someone a moment to breathe while pushing back against aggressive collection actions.

Giving a homeowner leverage

In Chapter 13 bankruptcy, there is an incentive for lenders to cooperate with the person filing to renegotiate certain debts. The repayment plans that people negotiate and the adjustments to their mortgages and other loans can make a big difference to their monthly budget and their ability to cover all of their expenses.

Lenders are more likely to agree to work with someone regarding how long they repay their mortgage and other key details as part of a Chapter 13 bankruptcy.

Making the budget easier to balance

Even if a lender won’t adjust someone’s mortgage terms because of a bankruptcy filing, bankruptcy can still make it easier for people to pay their mortgage every month. The discharge of someone’s unsecured debts will potentially free up hundreds of dollars previously going toward credit cards or medical bills for other expenses, like a mortgage.

Those who are worried about foreclosure and are hoping to protect their homes often end up turning to bankruptcy. Learning more about how bankruptcy can benefit those who are struggling with their mortgages can help people choose the best solutions for their current financial hardships.